[Federal Register Volume 68, Number 25 (Thursday, February 6, 2003)]
[Proposed Rules]
[Pages 6262-6293]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2608]



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Part II





Department of Housing and Urban Development





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24 CFR Part 902



Changes to the Public Housing Assessment System (PHAS); Proposed Rule

  Federal Register / Vol. 68, No. 25 / Thursday, February 6, 2003 / 
Proposed Rules  

[[Page 6262]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 902

[Docket No. FR-4707-P-01]
RIN 2577-AC32


Changes to the Public Housing Assessment System (PHAS)

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would amend the Public Housing Assessment 
System (PHAS) regulation at 24 CFR part 902 to provide additional 
information, revise certain procedures and establish others for the 
assessment of the physical condition, financial condition, management 
operations, and resident services and satisfaction with services 
provided to public housing residents. This proposed rule takes into 
consideration additional examination of the PHAS by HUD, as well as 
comments and suggestions on the PHAS provided through research 
conducted with representatives of public housing agencies (PHAs) and 
public housing residents.
    The purpose of the PHAS is to function as a management tool that 
effectively and fairly measures a PHA's performance based on standards 
that are uniform and verifiable.

DATES: Comment Due Date: April 7, 2003.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interim rule to the Regulations Division, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410-0500. Communications should 
refer to the above docket number and title. Facsimile (FAX) comments 
are not acceptable. A copy of each communication submitted will be 
available for public inspection and copying between 8 a.m. and 5 p.m. 
Eastern time weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: For further information contact the 
Office of Public and Indian Housing Real Estate Assessment Center (PIH-
REAC), Attention: Wanda Funk, Department of Housing and Urban 
Development, 1280 Maryland Avenue, SW, Suite 800, Washington DC, 20024; 
telephone Technical Assistance Center at (888)-245-4860 (this is a 
toll-free number). Persons with hearing or speech impairments may 
access that number via TTY by calling the Federal Information Relay 
Service at (800) 877-8339 (this is a toll-free number). Additional 
information is available from the PIH-REAC Internet site, http://www.hud.gov/reac.

SUPPLEMENTARY INFORMATION:

I. Background

Regulatory Background

    On September 1, 1998 (63 FR 46596), HUD published a final rule, 
codified at 24 CFR part 902, that established the PHAS, a new system 
for the assessment of America's public housing. Under the PHAS, HUD 
evaluates PHAs based on four key indicators: (1) The physical condition 
of the PHA's properties; (2) the PHA's financial condition; (3) the 
PHA's management operations; and (4) the residents' service and 
satisfaction assessment (through a resident survey). On the basis of 
these four indicators, PHAs receive a composite score that represents a 
single score for a PHA's entire operation and a corresponding 
performance designation. The PHAs that are designated high performers 
receive public recognition and relief from specific HUD requirements. 
The PHAs that are designated troubled or substandard receive remedial 
action.
    The PHAS regulation became effective for all PHAs with fiscal years 
ending (FYE) on and after September 30, 1999.
    To provide further information about the PHAS scoring process for 
each of the PHAS indicators, HUD published four scoring notices. The 
scoring notices which are periodically updated were first published on 
May 13, 1999: the Physical Condition Scoring at 64 FR 26166; the 
Financial Condition Scoring at 64 FR 26222; the Management Operations 
Scoring at 64 FR 26232; and the Resident Service and Satisfaction 
Scoring at 64 FR 26236.
    On January 11, 2000 (65 FR 1712), HUD issued a final rule that made 
certain amendments to the PHAS regulation applicable to PHAs with FYE 
on or after June 30, 2000. In the January 11, 2000, amended rule, HUD 
deferred full implementation of the PHAS for PHAs with FYE on September 
30, 1999, and December 31, 1999. These PHAs would receive an assessment 
score on the basis of HUD's assessment of the PHA's management 
operations in accordance with subpart D of part 902 and an overall PHAS 
advisory score.
    On June 6, 2000 (65 FR 36042), HUD issued a technical correction to 
the January 11, 2000, final rule, and further deferred full 
implementation of the PHAS for PHAs with FYE through March 31, 2000. On 
May 30, 2001, HUD issued a notice (66 FR 29342) further deferring full 
implementation of the PHAS until after June 30, 2001.
    On March 15, 2002 (67 FR 11844), HUD issued a notice advising that 
the PHAS became effective for PHAs with FYE on September 30, 2001. All 
PHAs now receive an overall PHAS score based on the four PHAS indicator 
scores and a corresponding designation based on the overall score. The 
notice advised that PHAs with FYE on September 30, 2001, through and 
including September 30, 2002, would be assessed in accordance with the 
interim scoring procedures described in the scoring notices published 
in the Federal Register on November 26, 2001, at 66 FR 59084 for the 
Physical Condition Indicator and at 66 FR 59126 for the Financial 
Condition Indicator.
    Then on August 30, 2002 (67 FR 55860), HUD published a notice that 
extended the interim scoring methodology to all PHAs with FYE December 
31, 2002, March 30, 2003, and June 30, 2003.

Recommendations for Changes to the PHAS

    Since its inception in 1998, the PHAS has been the subject of 
discussion and further consideration both internally within HUD, and 
among the public and the public housing industry. A report by the 
National Academy of Public Administration (Evaluating Methods for 
Monitoring and Improving HUD-Assisted Housing Programs, 2001), issued 
at the request of Congress, found that ``the credibility of HUD's new 
system has been undermined by its adversarial relationship with many of 
the entities that implement HUD-assisted housing programs.'' They 
stated, ``The Academy panel believes that HUD cannot achieve an 
effective, well-run quality-assurance program for its assisted housing 
programs without a more effective working relationship with the 
assisted housing industry. Improved working relationships are needed to 
raise the credibility of the assessment tools being used, reduce the 
administrative burden, and better align the system's goals with the 
outcomes that well-run assisted housing providers are trying to 
achieve. Failing this, the industry and HUD will continue to have 
unproductive confrontations over the assessment scores from HUD's new 
quality-assurance system.'' The Academy recommended that, ``In 
consultation with all of the affected parties, HUD should proceed to 
refine and modify its current quality-assurance system * * *.''
    In 2001, the Department followed this recommendation and met with 
public

[[Page 6263]]

housing stakeholders (including representatives of PHAs, residents, 
housing advocacy representatives, governmental representatives, and 
other groups) to discuss specific PHAS concerns and possible solutions.
    In the November 26, 2001, Federal Register notice proposing the 
interim scoring changes to the PHAS, the Department stated it expects 
to give extensive consideration to potential improvements in the PHAS, 
and that this consideration might lead to further changes in the PHAS.

II. Compliance Monitoring and Quality Assurance Procedures

    As a companion to implementation of the PHAS regulation that 
assesses a PHA's performance, HUD is expanding its programs for PHA 
compliance and quality assurance (QA) reviews. This places additional 
emphasis on the principle that with increased PHA flexibility comes 
additional accountability.
    HUD is also expecting more from itself through this increased 
emphasis on compliance and QA reviews, and is committing resources to 
both areas.
    The process to select PHAs for compliance and QA reviews will 
minimize duplication of resources and repetition of reviews for PHAs. 
Both review areas will share information obtained during PHA reviews, 
thus increasing efficiency and streamlining HUD's accountability 
efforts.

A. Compliance Monitoring

    HUD is introducing a new compliance monitoring initiative which is 
a management tool designed to focus and enhance HUD's compliance 
monitoring of PHAs.
    This new PHA compliance monitoring initiative will determine a 
PHA's compliance levels and direct the compliance monitoring resources 
accordingly. HUD will look at pre-selected business flags in the 
individual PHAS indicators that are most related to issues of 
compliance. When the indicator flags indicate that a PHA may have 
compliance issues, that PHA will be referred to the appropriate field 
office for further observation. HUD will use this information to 
identify the PHAs that will be scheduled for on-site compliance reviews 
conducted by field offices, thereby more accurately deploying the 
Department's compliance resources.
    HUD anticipates that field offices will conduct a minimum of 350 
annual, on-site compliance reviews nationwide. Approximately 150 of the 
PHAs that receive 80 percent of all funds will be reviewed annually and 
approximately 200 of the remaining PHAs will be reviewed annually.

B. Quality Assurance Procedures

    The QA procedures are designed to ensure that (1) Overall PHAS 
grades, as well as the individual indicator grades, are based on 
standards that are uniform and verifiable; and (2) the PHA maintains 
proper and accurate records supporting PHAS and Section 8 Management 
Assessment Program (SEMAP) certifications.
    Each of the PHAS subsystems undergoes rigorous quality assurance to 
ensure fair and accurate scores. For the Physical Assessment Subsystem, 
the QA plan is a multi-step procedure that employs both automated and 
manual reviews, the cornerstone of which is the QA inspection process.
    In the QA inspection process, trained HUD inspectors go on-site to 
verify the results of the physical inspections performed by HUD 
contract inspectors. These quality assurance reviews may be conducted 
at any time, including during the course of a property inspection, 
following an inspection, or as a separate analysis. The reviews seek to 
verify that the contract inspector has followed HUD's procedures and 
correctly assessed the property. An inspector who is not performing 
within HUD's protocol is subject to administrative action in the form 
of performance deficiency letters that may lead to decertification. 
Other measures in the QA plan include ongoing training of inspectors in 
HUD's protocol, and the use of automated systems that flag anomalies in 
the inspections as they are processed.
    Another QA procedure is the new PHAS Exigent Health and Safety 
(EHS) certification review. This certification review, performed by HUD 
staff, validates certain information that the PHA has provided to HUD. 
It is an on-site property review of the EHS deficiencies cited in the 
property inspection reports against the PHA's certification that these 
deficiencies have been corrected. Annually, HUD will conduct 
certification reviews for a minimum of 25 percent of the PHAs that were 
assessed under the PHAS and certified to the correction of EHS 
deficiencies.
    Both the Financial Assessment Subsystem and the Management 
Assessment Subsystem conduct automated reviews of all of their 
respective submissions when they are transmitted to HUD. This automated 
review is followed by a manual review. If corrections, changes, or 
further information are necessary, HUD contacts the PHA.
    There also is an independent audit review of the PHA's financial 
submission and management operations submission. The Independent Public 
Accountant (IPA) or Certified Public Accountant (CPA) performs the 
PHA's annual audit reviews and verifies the supporting documentation 
for these submissions. Then, in the audited submission, the IPA/CPA 
reports any findings to HUD. When the findings indicate inaccuracies or 
discrepancies, HUD adjusts the financial indicator, management 
indicator, and overall PHAS grade.
    For the Financial Assessment Subsystem, the Quality Assurance 
Subsystem (QASS) addresses the reliability of financial data collected 
and assessed by the PIH-REAC. The QASS staff conducts Quality Assurance 
Reviews (QARs) of IPA and CPA firms that perform financial statement 
and compliance audits of PHAs. The CPA firms are selected based on 
three established risk factors. These factors are: The number of audit 
clients; the total dollar amount (revenue and assets audited); and 
referrals from field offices, HUD management, or the PIH-REAC 
subsystems. Annually, the QASS staff performs a minimum of 15 reviews 
of CPA firms that audit PHAs. Teams of QASS auditors visit the firms 
and review a sample of audits and the associated working papers for 
compliance with professional auditing standards promulgated by the 
General Accounting Office and the American Institute of Certified 
Public Accountants (AICPA), as well as the Office of Management and 
Budget and the HUD audit requirements.
    When the QASS team identifies material departures from professional 
standards the team recommends administrative sanctions which may 
include referrals to one or more oversight bodies, such as state boards 
of accountancy, the AICPA Professional Ethics Division, state societies 
of CPAs, and HUD's enforcement office.
    The QA for the Resident Service and Satisfaction Subsystem includes 
a manual review of the random sample of addresses to ensure that they 
are complete and that there are no duplications. When the grade for the 
survey is generated, HUD performs a QA review of all grades of D or F 
to assure that the survey process was successful.
    The final PHAS QA procedure is the seven-day field office review of 
a PHA's overall PHAS grade. All PHAs' grades are transmitted to the 
field office for this review period prior to release of the grade to 
the PHA.
    In addition to the QAR reviews, the QASS staff also will perform 
two other

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types of reviews, both of which are new. The first additional review is 
the PHA monitoring review using the OMB A-133 Compliance Supplement. 
All major requirements associated with PIH programs are covered in the 
OMB A-133 Compliance Supplement and the monitoring review is to verify 
the PHA's adherence with statutes, regulations, and contract 
provisions; verify the documents supporting the PHAS (e.g., Management 
Operations (MASS) Certification) and SEMAP certifications; and verify 
the results of the testing that the PHA's CPA is to perform during the 
annual financial statement audit. The PHAs who will be visited for a 
monitoring review will be selected both randomly and through a targeted 
risk-based approach. Each year the QASS team will conduct approximately 
45 to 50 monitoring reviews nationwide. Once again, these reviews will 
be coordinated with field office staff to avoid repetitive reviews at 
the same PHA. Reported PHA findings, including false MASS 
certification, will result in appropriate follow-up action by the field 
office staff, such as referral for limited denial of participation 
(LDP), suspension, or debarment. The QASS staff will follow-up with 
CPAs who are not conducting the appropriate compliance testing. Follow-
up actions include, but are not limited to, referring the CPA to one or 
more oversight bodies and HUD's enforcement office and/or including the 
CPA firm in the risk ranking process for QARs.
    The second type of new review performed by QASS staff is an 
internal control review of PHA service providers (e.g., fee 
accountants). The QASS staff will perform independent internal control 
reviews of the largest PHA service providers and determine whether 
follow-up action is required. Depending on the deficiencies identified, 
referrals will be made to HUD's enforcement office for action if the 
PHA service provider failed to comply with HUD requirements.

III. Proposed Amendments to the PHAS

Policy Considerations

    After further research involving public housing stakeholders, as 
well as far-reaching internal review, HUD has developed proposed 
amendments to the PHAS. These proposed amendments to the PHAS make 
important improvements to the system, while retaining the core 
principle of ensuring housing is decent, safe, sanitary, and in good 
repair for public housing residents.
    HUD received suggestions for changes to the PHAS from 
representatives of the public housing industry, public housing 
directors, HUD program experts, residents, and recommendations from the 
Millennial Housing Commission. HUD evaluated all of these suggestions 
in a deliberative process that led to this latest version of the PHAS. 
As a result, the Department has made numerous changes to the PHAS.
    Above all, this proposed rule strives to be simpler to understand 
and utilize. It places more emphasis on assessing those items that 
directly affect day-to-day living conditions.
    The proposed amendments to the PHAS retain the basic structure of 
the rule that they replace. A PHA will continue to be evaluated in four 
areas: physical condition, financial condition, management operations, 
and resident service and satisfaction. The PHAS continues to rely on 
information that is verifiable by a third party wherever possible, but 
with clearer QA standards.
    Under current PHAS protocols, the evidence is clear there has been 
improvement generally in the management of the PHAs.
    Recognizing this improvement, this proposed PHAS rule gives PHAs 
increased flexibility and regulatory relief without sacrificing 
accountability. Under the proposal, Grade A PHAs will be assessed less 
often. The physical inspection scoring process is revised and places a 
stronger emphasis on the concept of livability and the immediate 
correction of exigent health and safety deficiencies. In the financial 
assessment, four of the component thresholds have been lowered for 
Small and Very Small PHAs. In addition, the penalty for high liquidity 
and reserves is eliminated. Along with this additional flexibility and 
regulatory relief, the Department is placing increased accountability 
on PHAs for the information they supply. The Department expects the 
highest standards of integrity from providers of public housing. All 
information to which PHAs self-certify will be subject to audit and 
verification. When this information is false, fraudulent, or otherwise 
justifies enforcement, the Department will take aggressive action 
against those who would abuse the public trust. The Department has also 
increased the penalties for late submissions.
    The proposed amendments to the PHAS are a collaborative effort 
between HUD and its partners. They have been developed out of mutual 
respect between HUD and the affected parties.

Highlights of Changes

    Under the proposed rule, a PHA will receive letter grades of A, B, 
C, D, or F, and the frequency of assessments is based on the 
designation. Under the current PHAS rule, a PHA receives numeric scores 
and is assessed annually. Further, under the proposed rule, a PHA will 
no longer be designated high performer, standard performer, or 
troubled. A PHA's designation will be a letter grade based on the 
overall PHAS grade and indicator grades. In addition to publishing the 
proposed amendments to the PHAS rule, HUD is also publishing five 
proposed grading notices for comment. Four of the notices explain the 
grading process for each of the four PHAS indicators, and there is one 
overall notice explaining the grading process in general.
    All observed deficiencies determine the physical condition score 
under the current rule. Under the proposed rule, only observed 
deficiencies that primarily impact ``livability'' determine the 
property grade.
    In the proposed rule, the penalty points under Current Ratio (CR) 
and Months Expendable Fund Balance (MEFB) for high liquidity or 
reserves are eliminated.
    In the proposed rule, the management operations self-sufficiency 
sub-indicator has four components rather than a stand-alone sub-
indicator. Furthermore, self-sufficiency questions have been added to 
the resident survey. The proposed rule changes the standards for rating 
vacant unit turnaround time, work orders, and annual inspection of 
dwelling units and building systems. The maximum time periods have 
decreased, and the percentages of units, and buildings and systems 
required to be inspected for a given grade have increased.
    Currently, the Resident Service and Satisfaction (RASS) indicator 
points are apportioned between the survey, and the implementation plan 
and follow-up plan certification. Under the proposed PHAS, the entire 
RASS assessment is based on survey results. If the survey process is 
not properly managed as directed by HUD, the PHA shall receive a zero 
and a grade of F under this indicator.
    Under the current PHAS rule, a PHA may be designated ``troubled in 
one area'' based on the physical, financial, or management score. In 
this proposed rule, a PHA may be referred to the appropriate HUD office 
for remedial action if it receives a grade of F in any one of the four 
PHAS indicators.
    The point deductions from the overall PHAS score for any late 
submission under the current rule are replaced with grade deductions 
from the affected indicators under the proposed rule. When a submission 
is late, the time period for a presumptive rating of

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failure for that indicator is changed from 90 days to 49 days.

Overview of Changes

    The following paragraphs describe the significant changes that will 
increase the fairness and accuracy of the assessments, and allow for 
more flexibility and regulatory relief for PHAs, while at the same time 
holding them increasingly accountable for performance.
    [sbull] Under the proposed PHAS system, PHAs would receive an 
overall PHAS grade, four indicator grades, and sub-indicator/component 
grades. This grading system would replace the scoring system of the 
current regulation. The grades would be A, B, C, D, and F. The sub-
indicator/component grades would determine the indicator grade. The 
four indicator grades would determine the overall PHAS grade. The 
weight of each of the four indicators would remain the same, i.e., 30 
percent for the physical condition indicator, 30 percent for the 
financial condition indicator, 30 percent for the management operations 
indicator, and 10 percent for the resident service and satisfaction 
indicator. To implement the new grading approach for assessing PHAs, 
HUD will publish five proposed grading notices for comment in the 
Federal Register.
    [sbull] A new assessment schedule is being proposed which 
recognizes and rewards superior performance. The frequency of a PHA's 
assessments would be based on its PHAS designation. All PHAs would be 
assessed under the four PHAS indicators in the first year after 
implementation of the revised PHAS rule. Each PHA's designation from 
that year would serve as its baseline. That baseline designation would 
determine the PHA's next PHAS assessments. When a PHA is designated 
Grade A, under this proposal the PHA will next be assessed in three 
years. When a PHA is designated Grade B, under this proposal the PHA 
will next be assessed in two years. When a PHA is designated Grade C, 
D, or F, under this proposal the PHA will be assessed the next year. 
Thereafter, the PHA's most recent designation would determine the 
intervals between PHAS assessments. These assessment intervals and the 
grading bands are modeled after those HUD uses for physical inspections 
of multifamily housing.
    [sbull] The designations ``high performer, standard performer, and 
troubled performer,'' would be replaced with grade designations. The 
grades proposed are A, B, C, D, and F, with A being the highest, 
similar to a ``high performer'' under the current system, and F being 
the lowest.
    [sbull] For a PHA that receives an overall PHAS grade of A, B or C, 
and that does not receive a grade of less than C in any of the 
indicators, the PHA's overall grade would serve as its designation. 
However, a PHA that receives a grade D in one or more indicators would 
be designated Grade D, regardless of the overall grade. Similarly, a 
PHA that receives a grade F in any of the indicators would be 
designated Grade F, regardless of the overall grade. Finally, a PHA 
that receives a grade F in the Capital Fund management operations sub-
indicator would be designated Capital Fund Grade F. This proposed 
grading system reflects the principle that designations signify the 
level of risk HUD assigns to PHAs, rather than a subjective 
categorization of their overall performance. A PHA that is under-
performing in one or more indicators is assumed to be at higher risk 
than a PHA that is performing at a level of least C across the 
indicators. The designations of Grade D or Grade F for PHAs that under-
perform in one or more indicators will reflect that heightened level of 
risk and will serve to increase the level of attention these PHAs 
receive from HUD field offices and other interested parties.
    [sbull] HUD would continue to assess the physical condition of 
properties in compliance with HUD's housing standard of decent, safe, 
sanitary, and in good repair. The characterization and reporting of the 
results, however, would be changed. The proposed approach would 
continue to use the existing inspection methodology but would place a 
stronger emphasis on the concept of livability and the correction of 
EHS deficiencies. Specific deficiencies that have a direct impact on 
residents would be identified and categorized in the new deficiency 
class ``livability.'' All EHS deficiencies would remain the same and 
require immediate correction or remedy. Deficiencies not classified as 
directly affecting livability or EHS concerns would be recorded and 
reported to the PHA, but will not impact a property's assessment grade.
    [sbull] Under the proposed livability concept, the existing 
property level numeric scoring approach would be changed to a letter-
based grading system of A, B, C, D, and F. PHAS Indicator 1 
grades would then be derived from the property grades. As in the 
current regulation, PHAS Indicator 1 grades for PHAs with more 
than one property would be calculated as a weighted average of the 
individual property results using the number of dwelling units in each 
property as weights.
    [sbull] The grading scale for the six Financial Condition Indicator 
components would be redistributed to allow equal weight for the 
financial condition and the financial management of a PHA.
    [sbull] In the financial condition assessment, the penalty points 
for PHAs with high liquidity or reserves under CR and MEFB would be 
eliminated. This will prevent PHAs with high liquidity or reserves from 
being unfairly penalized.
    [sbull] The proposed rule would reinstitute the peer group and 
threshold assessment methodologies for the CR and MEFB components of 
the Financial Condition Indicator. A PHA will receive a letter grade of 
A, B, C, D, or F for each component.
    [sbull] The proposed rule would establish an additional size 
category in the financial condition peer groupings. The Large size-
based category (i.e., those PHAs administering 1,250 to 9,999 units) 
will be divided into two large peer groups: Large (1,250-4,999 units) 
and Very Large (5,000-9,999 units). Further analysis demonstrates there 
is a statistically significant difference in distribution of component 
values between the Large and Very Large size categories, and that this 
will lead to a more accurate assessment.
    [sbull] The assessment thresholds for four of the financial 
condition components would be less stringent for small PHAs (less than 
250 units).
    [sbull] The number of components in MASS sub-indicator 2, 
Capital Fund, is proposed to be reduced from five to two. The two 
components that assess a PHA's compliance with statutory requirements 
for expending (component 1) and obligating (component 
2) capital funds would be retained. Grade A would be available 
to PHAs whose time for obligation and expenditure is extended because 
of those exemptions for obligation of funds that are provided in the 
statute, including an exemption that the Secretary may establish by 
notice. The Grade F standard would apply if there are unexpended or 
unobligated funds for any other reason.
    [sbull] Recognizing the importance of self-sufficiency to improving 
the lives of residents of public housing, the proposed PHAS amendment 
places greater emphasis on assessing a PHA's performance under HUD's 
various self-sufficiency programs. The management operations self-
sufficiency sub-indicator would be amended to better capture the PHA's 
performance in administering the various self-sufficiency programs. 
Questions regarding self-sufficiency would also be added to the 
resident survey, as residents' awareness of these

[[Page 6266]]

programs is key to their potential for success.
    [sbull] The standards for rating vacant unit turnaround time, work 
orders, and the annual inspection of dwelling units and systems are 
proposed to be changed. The maximum time permitted before a PHA will 
receive a grade of F for vacant unit turnaround time and completion of 
work orders would be decreased, as would the maximum time permitted in 
order to receive the highest grade. The grades between these two 
extremes would be distributed accordingly. Similarly, the percent of 
dwelling units and systems that are required to be inspected before the 
PHA will receive a grade of F would be increased. These proposed 
standards more closely reflect the standards in the private rental 
market.
    [sbull] Under the previous version of the PHAS, five of the 
available ten points in the RASS assessment went to the PHA for the 
follow-up plan and the implementation plan. To obtain a more accurate 
accounting of resident satisfaction, this assessment and the PHA's RASS 
grade would be based entirely on the responses to the resident survey, 
although, as a threshold matter, a PHA would receive a zero and a grade 
of F if it fails to implement the survey as HUD directs.
    [sbull] As in the three other PHAS indicators, a PHA that receives 
a grade of F under the RASS indicator would be designated a Grade F 
PHA. All Grade F PHAs are referred to the appropriate HUD office for 
remedial action, including execution of a Memorandum of Agreement.
    [sbull] The penalties for late submissions would be changed from 
point reductions to grade reductions. The time period before a PHA will 
receive a presumptive rating of zero for failing to make a submission 
would be reduced. In addition, the late penalties would apply to late 
submissions under each indicator. Accordingly, when a PHA submits its 
unaudited financial information or management certification more than 7 
days after the submission due date, but no more than 21 days after that 
date, the PHA's grade for each indicator submitted late would be 
lowered one letter grade. When a PHA submits its unaudited financial 
information or management certification more than 21 days, but no more 
than 35 days after the submission due date, the PHA's grade for each 
indicator submitted late would be lowered two letter grades. When a PHA 
submits its unaudited financial information or management certification 
more than 35 days, but no more than 49 days after the submission due 
date, the PHA's grade for each indicator submitted late would be 
lowered three letter grades. After 49 days, the PHA would receive a 
late presumptive rating of zero and a grade of F for each indicator 
submitted late.

IV. Section-by-Section Overview of the PHAS Amendments

    To assist the reader in identifying those sections of the existing 
PHAS regulation that are proposed to be revised and the new sections 
that would be added, the following provides a section-by-section 
overview of the amendments being proposed by this rule.

Subpart A--General Provisions

    Section 902.1 (Purpose and general description). Paragraph (a) 
would be amended to remove superfluous editorial comments pertaining to 
the purpose of the PHAS. Paragraph (b) would be removed because the 
Real Estate Assessment Center (REAC) is no longer independent of the 
Office of Public and Indian Housing (PIH). Following the administrative 
reorganization of HUD, REAC was incorporated into PIH. Paragraph (c), 
which briefly describes the PHAS Indicators, would be redesignated 
paragraph (b) and amended to add information pertaining to the 
objectives of each of the PHAS Indicators in former paragraphs 
Sec. Sec.  902.20(a), 902.30(a), 902.40(a) and 902.50(a). Paragraph (d) 
would be redesignated paragraph (c) and amended to reflect the proposal 
that PHAs be graded and not numerically scored. The proposed rule would 
remove paragraph (e) pertaining to changes in a PHA's fiscal year end 
because it is no longer applicable.
    Section 902.3 (Scope). This section proposes minor editorial 
changes.
    Section 902.5 (Applicability). This section would be amended to 
clarify the applicability of the PHAS to resident management 
corporations (RMCs), direct-funded resident management corporations 
(DF-RMCs) and alternate management entities (AMEs). Paragraph (a) would 
be divided into new paragraphs (a) and (b). The information in 
paragraph (b) pertaining to implementation of the PHAS is proposed to 
be placed in paragraph (d). The information in paragraph (b) pertaining 
to the issuance of PHAS advisory scores is removed because it is no 
longer applicable.
    Section 902.7 (Definitions). The proposed rule would delete the 
following definitions that are no longer applicable or are not used in 
the regulation: Occupancy loss; reduced actual vacancy rate within the 
previous three years; and tenant receivable outstanding. The following 
definitions are proposed to be added: Annual contributions contract 
(ACC); Assistant Secretary; certification review; decent, safe, 
sanitary, and in good repair; entity-wide; family self-sufficiency; 
Grade A PHA; Grade B, C, or D PHA; Grade F PHA; Memorandum of Agreement 
(MOA); the acronym PIH-REAC; and self-sufficiency. The following 
definitions would be clarified and rewritten in plain language: 
adjustment for physical condition and neighborhood environment; 
deficiency; reduced average number of days non-emergency work orders 
were active during the previous three years; and work order deferred to 
the Capital Fund Program. Section 902.9 (PHAS grading). This proposed 
new section would explain the letter-based grading system and organize 
PHAS scoring information in a more logical fashion. Additionally, this 
section would consolidate general grading information in one location, 
rather than placing it at the end of the subpart for each Indicator. 
Proposed paragraph (a) briefly describes the grading process. Proposed 
paragraphs (b) and (c) include information about the distribution of 
PHAS indicator grades among the four indicators, and availability of 
grading notices that is in current Sec. Sec.  902.25(a), 902.27, 
902.35(a)(1), 902.37, 902.45(a), 902.47, 902.53(a)(2) and 902.55.
    Section 902.10 (PHAS designation). This proposed new section 
presents the PHAS designation information in the first part of the 
regulation. The performance designations high performer, standard 
performer, and troubled, would be replaced by a grading system of the 
following letter grades: A, B, C, D, and F. Paragraphs (a) through (e) 
of this proposed section would contain amended information about the 
performance requirements for the PHAS designations that is in Sec.  
902.67(a), (b) and (c) of the current rule. Under this proposal, a 
PHA's designation would be A, B, or C, when its overall grade is an A, 
B, or C, and there are no indicator grades of D or F. A PHA would be 
designated a Grade D PHA if any of the indicator grades are a grade of 
D. A PHA would be designated a Grade F PHA if any of the indicator 
grades are a grade of F. If a PHA has a grade of F under the Capital 
Fund component of the management operations indicator, the PHA would be 
designated a Capital Fund Grade F PHA.
    Section 902.13 (Frequency of PHAS assessments). This proposed new 
section would describe the revised frequency of PHAS assessments. Under 
the new PHAS, the frequency of

[[Page 6267]]

assessment would be based on the performance of the PHA.
    Section 902.15 (Posting and publication of PHAS grades and 
designations). This proposed new section would include information 
about the provisions for posting and publication of PHAS grades that is 
in Sec.  902.63(e) of the current rule. This section proposes that HUD 
will continue to post final PHAS grades on the Internet, but removes 
the existing provision that HUD will publish final overall PHAS grades 
in the Federal Register.

Subpart B--PHAS Indicator 1: Physical Condition

    Section 902.20 (Physical condition assessment). This proposed rule 
would reorganize this section. Paragraph (a) pertaining to the 
objective of the physical condition assessment would be moved to new 
Sec.  902.1(b)(2). Paragraph (b)(1) and Sec.  902.24(a), which briefly 
describe the method of assessment, would be incorporated into new 
paragraph (a). Paragraph (b)(2) describing the assessments is proposed 
to be moved to Sec.  902.24(a). New paragraph (b) would include the 
information about transmission of inspection results included in Sec.  
902.24(a)(3). New paragraph (c) would include information pertaining to 
the frequency of physical inspections. Paragraph (c) pertaining to 
physical inspection requirements would be redesignated paragraph (d). 
New paragraph (e) pertaining to HUD access to PHA properties would 
contain the information in Sec.  902.24(d).
    Section 902.23 (Physical condition standards for public housing--
decent, safe, and sanitary housing in good repair (DSS/GR)). The title 
for this section is proposed to be changed to ``Inspectable areas.'' 
Paragraph (a) would be revised because information regarding DSS/GR has 
been moved to Sec.  902.7, ``Definitions.'' There would be minor 
editorial changes to paragraphs (b)(4) and (c), such as substituting 
the word ``housing'' with the term ``PHA properties.''
    Section 902.24 (Physical inspection of PHA properties). The 
information in currentSec.  902.24(a) pertaining to inspection of PHA 
properties would be moved to Sec.  902.20(a). The information in 
current Sec.  902.23(a)(1) pertaining to PHA compliance with DSS/GR 
standards would be moved to proposed Sec.  902.24(a). Proposed Sec.  
902.24(a) would also clarify that a random sample of dwelling units is 
to be inspected. Proposed Sec. Sec.  902.24 (a)(1) and (2) pertaining 
to inspection of occupied units contain the information in current 
Sec.  902.20(b)(2). The paragraph on off-line units currently in Sec.  
902.20(b)(2)(iii) would be revised to be more specific and would be 
located in Sec.  902.24(a)(2)(iii) of the proposed rule. The 
information in current Sec.  902.24 (a)(1) pertaining to inspector 
actions during a property inspection would be moved to new Sec.  
902.24(b). The information in current Sec.  902.24(a)(2) pertaining to 
PHA notification of health and safety deficiencies would be moved to 
new Sec.  902.24(c). Paragraph (c)(1) would state the requirement that 
PHAs correct all health and safety deficiencies. Paragraph (c)(2) would 
address procedures for EHS deficiencies. Each PHA must correct all EHS 
deficiencies within 24 hours and must certify to HUD that the 
corrections have been made. HUD will provide additional guidance on the 
certification requirements. Section 902.24(a)(3) pertaining to 
inspectors transmitting inspection results to HUD would be moved to new 
Sec.  902.20(b). Section 902.24(b), entitled ``definitions,'' would be 
redesignated new Sec.  902.24(d). This paragraph would be amended to 
remove the reference to the publishing for comment of significant 
amendments in the definition for ``Dictionary of Deficiency 
Definitions.'' The references to publishing proposed amendments to the 
Dictionary of Deficiency Definitions for comment would be moved to new 
Sec.  902.24(e). The definitions for criticality, Item Weights and 
Criticality Levels Document, normalized weights, score, and sub-area 
are removed because they are no longer applicable. The definitions for 
base grade, deficiency classification, Deficiency Classification 
Summary Document, grading class, livability, property grade, property 
livability points, and PHAS Indicator 1 grade are added. 
Section 902.24(c) pertaining to civil rights and nondiscrimination 
compliance would have minor editorial changes and would be redesignated 
Sec.  902.24(f). Section 902.24(d) regarding access to properties would 
be moved to new Sec.  902.20(f).
    Section 902.25 (Physical condition scoring and thresholds). The 
title for this section would be changed to ``Adjustments to physical 
condition property grade.'' Paragraph (a) pertaining to the Federal 
Register Scoring Notice (now Grading Notice) for the physical condition 
indicator would be moved to the new Sec.  902.9(c). As proposed, Sec.  
902.25(a) would only address the adjustments for physical condition and 
neighborhood environment currently in Sec.  902.25(b). The portion of 
paragraph (b) describing adjustments would be moved to paragraph (a), 
with editorial changes. The content of current paragraph (b)(1) would 
be removed. The definitions currently in paragraph (b)(2) would be 
moved to paragraphs (c)(1) and (2), with changes. Specifically, 
property age and percentage of families with incomes below the poverty 
rate would no longer be used as factors for the physical condition 
adjustment. Instead, the physical condition adjustment would apply to 
properties with documented design or structural defects that a PHA 
cannot correct, and the neighborhood environment adjustment would apply 
to documented conditions existing in the immediate surrounding 
neighborhood such as a landfill, floodplain, or other environmentally 
hazardous area. Current paragraph (b)(3) would become paragraph (b), 
rephrased in terms of a one-letter grade adjustment, and revised to 
remove the reference to property age and to add the concept that the 
adjustment would be determined by HUD on a case by case basis. Material 
on scattered-site properties, currently in paragraph (b)(4), would be 
deleted. Paragraph (b)(5), on supporting documentation, would be 
redesignated paragraph (e), with editorial changes. Proposed new 
paragraph (d) would clarify that a PHA would certify to the adjustment 
for physical condition and/or neighborhood environment as part of the 
management operations submission. Paragraph (c) regarding database 
adjustments would be redesignated as Sec.  902.26. Current Sec.  
902.25(d) regarding overall physical inspection score would be moved to 
new Sec.  902.28(d). The provision in current Sec.  902.25(e)(1) 
establishing the number of points (now percentage of grade) for this 
indicator would be moved, with changes, to new Sec.  902.9(b)(1). 
Paragraph (e)(2) pertaining to score (now grade) thresholds would be 
moved, with changes, to proposed Sec.  902.29.
    Section 902.26 (Physical inspection report). The title for this 
section would be changed to ``Database adjustments to physical 
condition assessments'' to reflect that this section now only addresses 
database adjustments. The information in paragraph (a) that describes 
the physical inspection report would be moved to proposed new Sec.  
902.27. Paragraphs (a)(1) through (a)(5) pertaining to reinspections 
when EHS deficiencies are corrected are proposed to be removed. The 
provisions in paragraphs (a)(1) through (5) have not been used by PHAs, 
and therefore are proposed to be replaced by provisions elsewhere in 
the proposed rule that are more beneficial to PHAs. Section 902.25(c) 
describing database

[[Page 6268]]

adjustments to physical inspection scores (as proposed, ``grades'') 
would be reorganized and redesignated as Sec.  902.26 (a) through (d). 
The language would be amended to clarify the circumstances in which a 
PHA may request a database adjustment.
    Section 902.27 (Physical condition portion of total PHAS points). 
The title for this section would be changed to ``Physical inspection 
report.'' The material in Sec.  902.26(a) that describes the physical 
inspection report would be moved to proposed Sec.  902.27(a). The 
section would reflect the proposed new scoring based on grade and 
livability and the changes to the inspection report.
    Section 902.28 (Overall Physical Condition Indicator grade). This 
is proposed as a new section. Paragraph (a) would describe the new 
system of property grades. Paragraph (b) would describe the impact of 
EHS deficiencies on property grades. Paragraph (c) would describe the 
requirements and consequences of PHA certification to EHS corrections, 
and to adjustments to physical condition and neighborhood environment. 
Paragraph (d) pertaining to the overall Physical Condition Indicator 
grade would contain the information in current Sec.  902.25(d), with 
revisions reflecting the new grading system for PHA properties.
    Section 902.29 (Threshold). This proposed new section would contain 
information pertaining to the performance threshold, currently found in 
Sec.  902.25(e), revised to reflect the proposed grading system.

Subpart C--PHAS Indicator 2: Financial Condition

    Most of the changes proposed to Subpart C are to provide 
clarification to the current regulation. Three of the changes would 
amend the financial condition grading. First, the reference in Sec.  
902.35(a)(3) to penalty points for PHAs with high liquidity or reserves 
under CR component and MEFB component would be eliminated. Second, the 
proposed Sec.  902.35(d) amends the Occupancy Loss (OL) component to 
clarify that the calculation for OL would not include Section 8 
assistance. Third, the grading thresholds for four of the components 
would be made less stringent for small PHAs (less than 250 units). 
Further changes to the financial condition grading will be provided in 
a separate PHAS Notice on the Financial Condition Grading Process.
    Section 902.30 (Financial condition assessment). Paragraph (a) 
pertaining to the objective of the financial condition assessment would 
be moved to proposed Sec.  902.1(b)(2). Proposed Sec.  902.30(a) would 
state the annual financial filing requirement for both the unaudited 
and audited financial information, currently found in Sec.  902.33(b) 
and (c). Proposed paragraph (b) contains the requirement for an IPA or 
CPA to certify to audited financial submissions. Proposed paragraph (c) 
contains the requirements and format of the financial information. 
Proposed paragraph (d) would list the components of the financial 
condition indicator. Proposed paragraph (e) would describe the annual 
electronic submission requirement for financial information.
    Section 902.33 (Financial reporting requirements). The title for 
this section is proposed to be changed to ``Financial condition 
grading.'' Sections 902.33(a), (b), and (c) of the current rule would 
be moved to Sec.  902.30 of this proposed rule. Proposed Sec. Sec.  
902.33(a) and (b) pertain to grading. The information in those sections 
is analogous to current Sec.  902.35(a) on scoring, amended to clarify 
the role of peer groups in financial grading. Proposed paragraph (c) 
pertains to grade adjustments after submission of audited financial 
information, similar to Sec.  902.63(b) of the current rule.
    Section 902.35 (Financial condition scoring and thresholds). The 
title for this section is proposed to be changed to ``Financial 
condition components.'' Section 902.35(a) would be removed and replaced 
by proposed Sec. Sec.  902.33(a) and (b). Section 902.35(a)(1) would be 
removed. Similar content would be reflected in the proposed rule Sec.  
902.9(c) on grading procedures, and Sec.  902.33 on financial condition 
grading. Paragraph (a)(2), regarding PHAS advisory scores, is proposed 
to be removed because it is no longer applicable. Paragraph (a)(3) 
regarding penalty points for PHAs with high liquidity or reserves under 
CR component and MEFB component is proposed to be removed. HUD will no 
longer penalize a PHA for having high liquidity or reserves under 
either the CR component or MEFB component.
    Section 902.35, as proposed, would only describe the six components 
of PHAS Indicator 2. The six components would remain the same 
as in current Sec.  902.35(b) except for revisions to the Occupancy 
Loss component in proposed Sec.  902.35(d) (currently in Sec.  
902.35(b)(4)).
    Section 902.37 (Financial condition portion of total PHAS points). 
The title for this section would be changed to ``Threshold.'' This 
section is analogous to current Sec.  902.35(c), revised to reflect the 
grading system.

Subpart D--PHAS Indicator 3: Management Operations

    The Management Operations Indicator would be significantly changed, 
with new sections describing the general requirements for management 
operations assessments and grading. Two new components would be added, 
evaluating a PHA's performance in the areas of income verification 
(7) and tenant rent calculation (8), in compliance 
with the President's management agenda goal of reducing overpayments of 
rent subsidies. Each of the eight sub-indicators, including their 
components, specific exemptions, and grades are described in a separate 
section in this proposed rule. Each sub-indicator would be of equal 
weight. More detailed information is provided in the PHAS Notice on the 
Management Operations Grading Process.
    Section 902.40 (Management operations assessment and performance 
standards). Paragraph (a) pertaining to objectives of the management 
operations assessment would be incorporated into proposed Sec.  
902.1(b)(3). Proposed Sec.  902.40(c) lists the management operations 
sub-indicators, as well as the specific exemptions for two of the sub-
indicators, the components and the ratings, of each sub-indicator and/
or component. The grading for management operations would be a scale of 
grades A, B, C, D, and F. All of the sub-indicators would be graded 
either under the A, B, C, D, F scale, the A, C, F scale, or, in the 
case of the Capital Fund sub-indicator, the new rent and income 
verification sub-indicators, and two components of the security sub-
indicator, on an A and F scale. Proposed paragraph (d) states that in 
the case of PHAs reviewed less often than annually under proposed Sec.  
902.13(a), the management operations certification shall include only 
information for the assessed fiscal year. Proposed paragraph (e) states 
the HUD existing requirement that the management operations submission 
is subject to the PHA's annual audit. It would provide for HUD on-site 
review of the submission and supporting documentation. Paragraph (e) 
also proposes consequences for failure to maintain supporting 
documentation.
    Section 902.41 (Management operations sub-indicator #1--vacant unit 
turnaround time). This proposed new section would state the specific 
exemptions for the vacant unit turnaround time sub-indicator, as well 
as guidance for maintaining documentation to support such exemptions 
(see proposed Sec.  902.41(a)).

[[Page 6269]]

This section would make one important change to current practice. Where 
it is currently HUD's practice to exempt employee occupied units from 
the unit turnaround time calculation, as provided at 24 CFR Sec.  
901.10, proposed Sec.  902.41(a) would not retain that exemption. 
Proposed Sec.  902.41(e) would state the standards for grades A, B, C, 
D, and F.
    Section 902.42 (Management operations sub-indicator #2--Capital 
Fund). This sub-indicator would be changed from five components to two 
components in accordance with Sec.  9(j) of the 1937 Act as amended by 
Sec.  519 of the Quality Housing and Work Responsibility Act of 1998, 
Pub. L. 105-276 (approved Oct. 21, 1998) (QHWRA). Section 9(j) 
specifically states the time limits for expenditure and obligation of 
funds to be four years and two years, respectively, except for 
extensions or waivers as approved by the Secretary. Section 9(j) also 
provides that the Secretary shall enforce the expenditure and 
obligation requirements. Therefore, the proposed rule would follow 
closely the requirements of section 9(j). The three components that 
would be eliminated are budget controls, quality of the physical work, 
and contract administration. The two components that would be measured 
are timeliness of expenditure of funds and timeliness of obligation of 
funds. This sub-indicator, and its components, would be graded on an A 
and F scale. This sub-indicator would be automatically excluded if a 
PHA chooses not to receive capital funding under Sec.  9(d).
    Section 902.43 (Management operations performance standards). The 
title for this section would be changed to ``Management operations sub-
indicator 3--work orders.'' This proposed rule would 
redesignate Sec. Sec.  902.43(a)(1) through 902.43(a)(5), which 
describe the management operations sub-indicators, as Sec. Sec.  902.41 
through 902.46, respectively, and would move Sec.  902.43(b)(2) 
pertaining to requests for manual rather than electronic submissions to 
Sec.  902.60(a).
    As proposed, Sec.  902.43 describes work orders, and states the 
standards for grades A, B, C, D, and F. The standards for component 
1, emergency work orders, would remain the same as the current 
standard, which is similar to the standard for indicator number four in 
the Public Housing Management Assessment Program (PHMAP) regulation, 24 
CFR 901.25(a). The Grade F standard would apply when less than 96 
percent of emergency work orders were completed or the emergency was 
abated within 24 hours or less. The standards for non-emergency work 
orders (component 2) would be shortened. The standard for a 
Grade A for this component would be shortened to seven days, and, for a 
Grade F, the standard would be shortened to greater than 30 calendar 
days rather than greater than 60 calendar days. These new standards 
more realistically reflect the standards in the private market.
    Section 902.44 (Management operations sub-indicator #4--annual 
inspection of dwelling units and systems). This section would 
incorporate the information in Sec.  902.43(a)(4) of the current rule. 
This section would state the specific exemptions for this sub-
indicator, as well as provide guidance for maintaining documentation to 
support such exemptions. It would state the standards for grades A, B, 
C, D, and F. The standards for a Grade F for component 1, 
annual inspection of dwelling units, and component 2, annual 
inspection of systems, would be less than 96 percent of inspected 
component 1, annual inspection of dwelling units, and to less 
than 85 percent for component 2, annual inspection of systems, 
to more closely reflect the standards in the private market.
    Section 902.45 (Management operations scoring and thresholds). The 
title for this section would be changed to ``Management operations sub-
indicator 5--security.'' The information in paragraph (a) 
pertaining to the Federal Register Scoring Notice (as proposed, the 
``grading notice'') for the management operations indicator is moved to 
the new Sec.  902.9(c). Paragraph (b) pertaining to scoring thresholds 
would be moved to new Sec.  902.49 and rewritten to reflect the 
proposed new grading system.
    Proposed Sec.  902.45 incorporates the information in Sec.  
902.43(a)(5) regarding the security sub-indicator, and lists the 
standards for grades A, B, C, D, and F for component 1, tracking and 
reporting crime and crime-related problems by category of crime and 
date, time, and place of incident, and the standards for A and F for 
components 2 and 3, screening of applicants and lease 
enforcement, respectively. Component 4, grant program goals, 
would be removed from this sub-indicator. The standards for components 
1, tracking and reporting crime-related problems by category 
and date, time, and place of incident, would be stated as grades A, B, 
C, D, and F, and would require tracking of crimes by category as well 
as tracking of actions taken by the PHA to address the crime-related 
issue. The standards for components 2 and 3, 
screening of applicants and lease enforcement, respectively, would be 
stated as A and F, revising the approach taken in 24 CFR 901.45(b) and 
(c) of PHMAP.
    Section 902.46 (Management operations sub-indicator #6--self-
sufficiency). This proposed new section would incorporate the 
information in Sec.  902.43(a)(6) on the self-sufficiency sub-
indicator. This sub-indicator would be changed in its entirety. There 
would be four new components: component 1, economic self-
sufficiency; component 2, Family Self-Sufficiency (FSS); 
component 3, resident job training and employment; and 
component 4, resident participation in management, business 
development, and public housing administration. Each of these 
components would be graded A, C, or F. The FSS component is proposed to 
be analogous to the FSS component under SEMAP, 24 CFR Sec.  985.3(o), 
and would be based on percentage of participation and percentage of 
participating families who have escrow accounts greater than zero.
    Section 902.47 (Management operations sub-indicator  7--
income verification). This sub-indicator would be new, and would 
evaluate the PHA's performance in properly verifying all residents' 
income, including such matters as exclusions from income and utility 
allowances. The grades would be either A or F. The information in 
current Sec.  902.47 would be moved to proposed Sec.  902.9(b).
    Section 902.48 (Management operations sub-indicator  8--
rent calculation). This new sub-indicator would evaluate a PHA's 
performance in correctly calculating tenant rent for all tenants. The 
possible grades would be A or F.
    Section 902.49 (Threshold). This proposed new section describes the 
grading threshold for the Management Operations Indicator. It contains 
information pertaining to the scoring threshold currently in Sec.  
902.45(b), revised to reflect the proposed grading system.

Subpart E--PHAS Indicator 4: Resident Service and Satisfaction

    This subpart would be substantially revised to present the 
information in a clearer manner and to reflect that the grade is based 
primarily on the survey results, although a PHA will receive an F if it 
fails to implement the survey according to HUD's instructions. Under 
this proposed rule, a PHA would continue to receive the media package 
from HUD and is required to certify to the implementation of the survey 
in the RASS. However, a PHA would not be graded for the performance of 
the

[[Page 6270]]

implementation plan, other than to receive an F if it fails to properly 
implement it according to HUD's instructions. A PHA would be required 
to update unit addresses in the Public and Indian Housing Information 
Center (PIC) database and certify to updating unit addresses in RASS. 
The follow-up plan would no longer be required and would not be graded. 
The survey would include new questions on family self-sufficiency. More 
detailed information on the grading of this indicator would be provided 
in the PHAS Notice on the Resident Service and Satisfaction Grading 
Process.
    Section 902.50 (Resident service and satisfaction assessment). 
Paragraph (a) of current Sec.  902.50, pertaining to the objectives of 
the resident service and satisfaction assessment, would be incorporated 
into new Sec.  902.1(b)(4). Current Sec.  902.50(b) would be 
redesignated paragraph (a), and would briefly describe the method of 
assessment. Current Sec.  902.50(c), describing the survey process, 
would be redesignated paragraph (b). Proposed paragraph (c) parallels 
proposed Sec.  902.40(e) regarding HUD on-site review of the required 
certifications and activities. The paragraph also describes the 
consequences for failure to maintain supporting documentation.
    Section 902.51 (Updating of public housing unit address 
information). The title for this section would be changed to 
``Certifications and updating of unit address information.'' This 
section would be amended and would clarify the responsibilities of a 
PHA regarding the survey process. The information in paragraph (c) 
pertaining to requests for manual rather than electronic submissions is 
moved to proposed Sec.  902.60(b).
    Section 902.52 (Distribution of survey to residents). The title for 
this section would be changed to ``Resident survey sampling.'' Current 
Sec.  902.52(a), pertaining to resident survey sampling, would comprise 
the entire proposed Sec.  902.52. The most significant change is that 
the proposed section would require the sample of units to be random. 
Current Sec.  902.52(b), pertaining to a third party survey 
administrator, is moved to Sec.  902.53.
    Section 902.53 (Resident service and satisfaction scoring and 
thresholds). The title for this section would be changed to ``Third 
party administrator.'' Paragraph (a)(1) pertaining to scoring (now 
grading) would be moved to new Sec.  902.54. Paragraph (a)(2) 
pertaining to Federal Register Scoring Notice (as proposed, the 
``grading notice'') for the resident service and satisfaction indicator 
would be moved to new Sec.  902.9(c). Section 902.53(b) pertaining to 
performance threshold would be moved to Sec.  902.55. The information 
in Sec.  902.52(b) pertaining to the third party survey administrator 
would comprise this proposed section.
    Section 902.54 (Resident service and satisfaction grading and 
survey contents). This proposed section would explain the grading and 
contents of the resident survey. This section would reflect that the 
grade for this indicator is proposed to be based on survey results 
only. This section also would reflect that the content of the survey is 
proposed to be changed to include questions regarding self-sufficiency. 
The survey questions regarding services would be moved to the category 
of maintenance and repair in order to consolidate questions in these 
categories.
    Section 902.55 (Resident service and satisfaction portion of total 
PHAS points). The title for this section would be changed to 
``Threshold.'' The information in this section pertaining to scoring 
(``grading'' in this proposed rule) would be moved to new Sec.  
902.9(b). This section would contain the information pertaining to 
performance thresholds in Sec.  902.53(b), revised to reflect the 
proposed grading system.

Subpart F--PHAS submissions and grading adjustments

    Section 902.60 (Data collection). This section would be completely 
redrafted and renamed ``Requests for manual and late submissions.'' The 
information currently in paragraph (a) pertaining to fiscal year 
reporting periods would be removed because the information is no longer 
applicable. The information currently in paragraph (b) pertaining to 
collection of physical inspection data would be moved to proposed Sec.  
902.9(b)(1). The information currently in paragraph (c) pertaining to 
the submissions of financial information would be moved to the new 
Sec.  902.9(b)(2). The information currently in paragraph (d) 
pertaining to management operations submissions would be moved to new 
Sec.  902.9(b)(3). The information currently in paragraph (d)(2) 
pertaining to the retention of documentation that supports the 
submissions and calculations is moved to new Sec.  902.63(c). Proposed 
Sec.  902.60(a), pertaining to the request to manually submit 
information for Indicators 2 and 3, contains the 
information currently in Sec.  902.43(b)(2). Proposed Sec.  902.60(b) 
pertaining to the request to manually submit information for Indicator 
4 contains the information currently in Sec.  902.51(c). 
Proposed Sec.  902.60(c) would pertain to the request for extension of 
time to make submissions. Proposed Sec.  902.60(d) would provide for a 
request for extension of time to submit audited financial information. 
The information currently in Sec. Sec.  902.60(f)(1) and (2) pertaining 
to circumstances in which HUD may make adjustments to a PHA's score 
would be moved to proposed Sec. Sec.  902.63(c)(2) and (3), 
respectively. The information currently in Sec.  902.60(g) regarding 
RMCs and DF-RMCs would be in proposed Sec.  902.5(a).
    Section 902.61 (Failure to submit data). This proposed new section 
would state the information currently in Sec.  902.60(e). The penalties 
for late submissions would be increased, and the time period before a 
PHA will receive a presumptive rating of zero would be reduced. 
Proposed Sec.  902.61(b) would provide for presumptive ratings of zero 
in the case of late submissions, similar to current Sec.  902.60(e)(2). 
The penalties and late presumptive rating provisions also would be 
presented in table format for clarity.
    Section 902.63 (PHAS grading adjustments). Paragraph (a) pertaining 
to the computation method of a PHAS score (now grade) would be moved to 
proposed Sec.  902.9(a). Paragraph (b) would be amended to reflect the 
proposed grading system and to organize the information in a more 
logical fashion. Paragraph (c) pertaining to issuance of a PHAS score 
by HUD would be redesignated new paragraph (a) and revised to reflect 
the proposed grading system. This proposed paragraph expressly states 
when a PHAS grade is final, and this meaning is used throughout the 
proposed rule to prevent misunderstanding. Paragraph (d) would contain 
minor editorial changes. Paragraph (e) pertaining to posting and 
publication of PHAS grades would be moved to proposed Sec.  902.15.
    Section 902.67 (Score and designation status). The title for this 
section would be changed to ``Withholding, denying, and rescinding 
grades'' because it would, as proposed, only address situations when a 
grade may be withheld, denied, or rescinded. Paragraphs (a), (b), and 
(c) pertaining to performer designation status would be moved to 
proposed Sec. Sec.  902.10(a), (b), and (c) and amended to reflect the 
new grading system. The amendments describe the proposed terms for PHAS 
designation, which would be Grade A PHA, Grade B PHA, Grade C PHA, 
Grade C PHA, and Grade F PHA. Section 902.67(d) pertaining to 
withholding, denying, and rescinding designations would comprise 
proposed Sec. Sec.  902.67(a) through (c), which clarify

[[Page 6271]]

when HUD may withhold or rescind a PHA's PHAS designation.
    Section 902.68 (Technical review of results of PHAS Indicators #1 
or #4). This section would be rewritten, in part, for the purposes of 
providing clarity. A new paragraph (d) would be added, providing that 
the Assistant Secretary reviews all technical reviews that are denied.
    Section 902.69 (PHA right of petition and appeal). This section 
would be rewritten to provide more clarity and consistency in 
terminology. Throughout this section, reference is made to Grade A PHA, 
Grade B PHA, Grade C PHA, Grade D PHA, Grade F PHA, and Capital Fund 
Grade F PHA. Two situations in which a PHA has a right to appeal would 
be added. As proposed, a PHA may appeal its final overall PHAS grade if 
the change would result in a higher grade. In addition, a PHA that is 
under the jurisdiction of the HUD office with jurisdiction over Grade F 
PHAs would have the right to appeal after one year if granting the 
appeal would result in meeting the requirements to substantially 
improve its performance under PHAS pursuant to Sec.  902.75(f).

Subpart G--PHAS Incentives and Remedies

    Section 902.71 (Incentives for high performers). The title for this 
section would be changed to ``Incentives for Grade A PHAs.'' This 
proposed section contains editorial changes and would be amended to 
reflect that the highest designation would be ``Grade A PHA.'' Although 
exempt from annual assessments, Grade A PHAs would be required to 
submit financial information annually.
    Section 902.73 (Referral to an area Hub/Program Center). The title 
for this section would be changed to ``Referral of Grade B, C, and D 
PHAs.'' This section is proposed to be rewritten to more clearly 
present the process and content of the Improvement Plan. Information 
currently in this section regarding RMCs and DF-RMCs would be moved to 
Sec.  902.5.
    Section 902.75 (Referral to a Troubled Agency Recovery Center 
(TARC)). The title for this section would be changed to ``Referral of 
Grade F PHAs.'' All of the paragraphs in this section would be 
rewritten to streamline and clarify the information pertaining to the 
performance requirements of PHAs that have been referred to the HUD 
office with jurisdiction over Grade F PHAs. The information in 
paragraph (b) pertaining to MOAs would be reorganized for clarity into 
paragraphs (b) and (c). Paragraph (c), discussing a PHA's review of the 
MOA, would be deleted. Paragraph (d) addressing the statutorily 
prescribed maximum time a PHA may remain under the jurisdiction of the 
HUD office responsible for Grade F PHAs would be redesignated paragraph 
(f). Paragraph (f) regarding resident participation would be deleted. 
The involvement of resident leadership in the MOA would be described in 
paragraph (c)(7). Because the time periods that a Grade F PHA can 
remain under the jurisdiction of the remedial HUD office would be 
explained in subparagraphs (f)(1) and (f)(2), the example that is in 
current paragraph (g)(3) is deleted. Paragraph (h) providing for HUD 
audit reviews of Grade F PHAs would be redesignated paragraph (g). 
Paragraph (i) providing for continuation of service to residents would 
be redesignated paragraph (h).
    Section 902.77 (Referral to the Departmental Enforcement Center 
(DEC)). The name of this section would be changed to ``Actions and 
sanctions.'' All references to the DEC would be changed to reflect a 
reorganization within the Department. This section would be rewritten 
to streamline and clarify the information pertaining to PHA 
nonperformance and the actions that HUD may take against a PHA.
    Section 902.79 (Substantial default). Proposed Sec.  902.79(a)(1), 
like the current section, describes the events or conditions that 
constitute a substantial default. Paragraph (a)(5) of this section 
would be redesignated paragraph (b) of this proposed section. Paragraph 
(b) of this section would be redesignated paragraph (c) of this 
proposed section. This section also proposes minor editorial changes.
    Section 902.83 (Interventions). This section would be rewritten to 
clarify the information pertaining to interventions HUD may initiate if 
HUD determines that a PHA is in substantial default.
    Section 902.85 (Resident petitions for remedial action). This 
section would be rewritten to more clearly present the information 
pertaining to the percentage of residents required to participate in a 
petition for remedial action.

V. Findings and Certifications

Paperwork Reduction Act Statement

    The revised information collection requirements contained in this 
rule have been submitted to the Office of Management and Budget (OMB) 
for review under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520). Under this Act, an agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless the collection displays a valid control number.
    The public reporting burden for this new collection of information 
is estimated to include the time for reviewing the instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. 
Information on the estimated public reporting burden is provided in the 
following table.

----------------------------------------------------------------------------------------------------------------
                                                                              Total
             Information collection               Under OMB    Number of      annual     Hours per   Total hours
                                                 control No.  respondents   responses     response
----------------------------------------------------------------------------------------------------------------
Financial Management Template..................    2535-0107        5,964        5,964            5       29,850
Management Operations Certification............    2535-0106        3,169        3,169            2      6,274.5
Assessment of Resident Satisfaction:...........    2507-0001      637,629      267,382  0.25 --Res.       78,104
                                                                                           4.8--PHA
Residents......................................  ...........      631,283      262,398          .25       65,600
PHAs-Unit Addresses............................  ...........        3,173        2,394         2.24        5,371
PHAs-Implementation Plan.......................  ...........        3,173        2,590         2.75        7,133
    RASS Totals................................  ...........      637,629      267,382  ...........       78,104
----------------------------------------------------------------------------------------------------------------

    In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments 
from members of the public and affected agencies concerning the 
proposed collection of information to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and

[[Page 6272]]

    (4) Minimize the burden of the collection of information on those 
who are to respond, including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.
    Interested persons are invited to submit comments regarding the 
information collection requirements in this proposal. Comments must be 
received by April 7, 2003. Comments must refer to the proposal by name 
and docket number (FR-4707-P-01) and must be sent to:

Lauren Wittenberg, OMB Desk Officer, Office of Management and Budget, 
Room 10235, New Executive Office Building, Washington, DC 20503, Fax 
number (202) 395-6947, E-mail [email protected].

and

Rules Docket Clerk, Office of the General Counsel, Room 10276, U.S. 
Department of Housing and Urban Development, 451 Seventh Street, SW, 
Washington, DC 20410.

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the office of the Department's Rules 
Docket Clerk, Room 10276, 451 Seventh Street, SW, Washington, DC 20410-
0500.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 establishes 
requirements for federal agencies to assess the effects of their 
regulatory actions on state, local, and tribal governments, and the 
private sector. This rule will not impose any federal mandates on any 
state, local, or tribal governments or the private sector within the 
meaning of the Unfunded Mandates Reform Act of 1995.

Environmental Review

    A Finding of No Significant Impact with respect to the environment 
was made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). The Finding remains available for public 
inspection during regular business hours in the Office of the Rules 
Docket Clerk, Office of General Counsel, Department of Housing and 
Urban Development, Room 10276, 451 Seventh Street, SW., Washington, DC 
20410.

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this rule, and in so doing 
certifies that this rule is not anticipated to have a significant 
economic impact on a substantial number of small entities. This rule 
revises HUD's existing regulations for the assessment of public housing 
at 24 CFR part 902, PHAS, to revise certain procedures to clarify the 
regulation and to simplify the PHAS process. The additional information 
and the revision of certain procedures impose no significant economic 
impact on a substantial number of small entities.
    Notwithstanding HUD's determination that this rule will not have a 
significant effect on a substantial number of small entities, HUD 
specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Federalism

    The General Counsel, as the Designated Official under Executive 
Order 12612, Federalism, has determined that the policies contained in 
this rule will not have substantial direct effects on states or their 
political subdivisions, on the relationship between the federal 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. This rule is 
intended to promote good management practices by including, in HUD's 
relationship with PHAs, continuing review of PHAs' compliance with 
already existing requirements. This rule will not create any new 
significant requirements. As a result, the rule is not subject to 
review under the Order.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance numbers for Public 
Housing is 14.850.

List of Subjects in 24 CFR part 902

    Administrative practice and procedure, Public Housing, Reporting 
and recordkeeping requirements.
    Accordingly, HUD proposes to revise 24 CFR part 902 to read as 
follows:

PART 902--PUBLIC HOUSING ASSESSMENT SYSTEM

Subpart A--General Provisions
Sec.
902.1 Purpose and general description.
902.3 Scope.
902.5 Applicability.
902.7 Definitions.
902.9 PHAS grading.
902.10 PHAS designation.
902.13 Frequency of PHAS assessments.
902.15 Posting and publication of PHAS grades and designations.
Subpart B--PHAS Indicator 1: Physical Condition
902.20 Physical condition assessment.
902.23 Inspectable areas.
902.24 Physical inspection of PHA properties.
902.25 Adjustments to physical condition property grade.
902.26 Database adjustments to physical condition assessments.
902.27 Physical inspection report.
902.28 Overall physical condition indicator grade.
902.29 Threshold.
Subpart C--PHAS Indicator 2: Financial Condition
902.30 Financial condition assessment.
902.33 Financial condition grading.
902.35 Financial condition components.
902.37 Threshold.
Subpart D--PHAS Indicator 3: Management Operations
902.40 Management operations assessment and performance standards.
902.41 Management operations sub-indicator 1--vacant unit 
turnaround time.
902.42 Management operations sub-indicator 2--Capital Fund.
902.43 Management operations sub-indicator 3--work orders.
902.44 Management operations sub-indicator 4--annual 
inspection of dwelling units and systems.
902.45 Management operations sub-indicator 5--security.
902.46 Management operations sub-indicator 6--self-
sufficiency.
902.47 Management operations sub-indicator 7--income 
verification.
902.48 Management operations sub-indicator 8--rent 
calculation.
902.49 Threshold.
Subpart E--PHAS Indicator 4: Resident Service and Satisfaction
902.50 Resident service and satisfaction assessment.
902.51 Certification and updating of unit address information.
902.52 Resident survey sampling.
902.53 Third party administrator.
902.54 Resident service and satisfaction grading and survey 
contents.
902.55 Threshold.
Subpart F--PHAS Submission Requests and Grade Adjustments
902.60 Requests for manual and late submissions.

[[Page 6273]]

902.61 Failure to submit data.
902.63 PHAS grade adjustments.
902.67 Withholding, denying, and rescinding grades.
902.68 Technical review of results of PHAS Indicators 1 or 
4.
902.69 PHA right of petition and appeal.
Subpart G--PHAS Incentives and Remedies
902.71 Incentives for Grade A PHAs.
902.73 Referral of Grade B, C, and D PHAs.
902.75 Referral of Grade F PHAs.
902.77 Actions and sanctions.
902.79 Substantial default.
902.83 Interventions.
902.85 Resident petitions for remedial action.

    Authority: 42 U.S.C. 1437d(j) and 3535(d).

Subpart A--General Provisions


Sec.  902.1  Purpose and general description.

    (a) Purpose. The Public Housing Assessment System (PHAS) provides a 
management tool for effectively and fairly measuring the performance of 
a public housing agency (PHA) in essential housing operations, 
including rewards for strong performers and consequences for poor 
performers.
    (b) PHAS Indicators. PHAS assesses and grades a PHA's performance 
based on four indicators.
    (1) PHAS Indicator 1 assesses the physical condition of a 
PHA's properties (see subpart B of this part). The objective of the 
Physical Condition Indicator is to determine whether a PHA is meeting 
HUD's standard for acceptable basic housing conditions--decent, safe, 
sanitary and in good repair (DSS/GR)--and the level to which the PHA is 
maintaining its public housing in accordance with this standard.
    (2) PHAS Indicator 2 assesses the financial condition of a 
PHA (see subpart C of this part). The objective of the Financial 
Condition Indicator is to measure the financial condition of a PHA to 
evaluate whether it has sufficient financial resources and is capable 
of managing those financial resources effectively to provide housing 
that is DSS/GR.
    (3) PHAS Indicator 3 assesses the management operations of 
a PHA (see subpart D of this part). The objective of the Management 
Operations Indicator is to measure certain key management operations 
and responsibilities of a PHA for the purpose of assessing the PHA's 
management operations performance.
    (4) PHAS Indicator 4 assesses the resident service and 
satisfaction feedback on a PHA's operations (see subpart E of this 
part). The objective of the Resident Service and Satisfaction Indicator 
is to measure the level of resident satisfaction with living conditions 
at the PHA.
    (c) Assessment tools. HUD shall use uniform and objective protocols 
for the physical inspection of properties and the financial assessment 
of the PHA, and shall gather relevant data from the PHA and the PHA's 
public housing residents to assess management operations and resident 
service and satisfaction, respectively. On the basis of this data, HUD 
shall assess and grade the results, advise PHAs of their grade and 
identify low graded PHAs so that these PHAs shall receive the 
appropriate guidance to improve performance and provision of services 
to residents.


Sec.  902.3  Scope.

    (a) The PHAS measures a PHA's essential housing operations. All 
PHAs remain responsible for complying with requirements such as fair 
housing and equal opportunity requirements, requirements under section 
504 of the Rehabilitation Act of 1973 (29 U.S.C. 794), and requirements 
of programs under which the PHA is receiving assistance even though 
these other requirements are not specifically referenced in this part. 
A PHA's adherence to all requirements will be monitored in accordance 
with the applicable program regulations, HUD compliance and review 
policies, and the PHA's Annual Contributions Contract (ACC).
    (b) All PHA certifications, year-end financial information, and 
supporting documentation are subject to HUD verification at any time, 
including an independent auditor review. Failure to maintain and 
provide supporting documentation for any indicator(s), sub-indicator(s) 
and/or component(s) shall result in a zero and grade of F for the 
indicator(s), sub-indicator(s) and/or component(s), and a lower overall 
PHAS grade. Appropriate sanctions for false certifications shall be 
imposed, including civil penalties, limited denial of participation, 
suspension or debarment of the signatories, the loss of Grade A PHA 
designation, pursuant to Sec.  902.67, and a lower grade under the PHAS 
indicators. See Sec.  902.63.


Sec.  902.5  Applicability.

    (a) PHAs, RMCs, DF-RMCs, and AMEs. This part applies to PHAs (as 
described in Sec. Sec.  902.1 and 902.3) and to Resident Management 
Corporations (RMCs), RMCs that receive direct funding from HUD in 
accordance with Sec.  20 of the Act (DF-RMCs) (42 U.S.C. 1437r) and 
alternate management entities (AMEs). When management operations of a 
PHA's properties have been assumed by an RMC, the PHA's certification 
shall identify the property and the management functions assumed by the 
RMC.
    (b) Assessments of RMCs, DF-RMCs and AMEs. (1) RMCs and DF-RMCs 
will be assessed and issued grades under PHAS based on the public 
housing properties or portions of public housing properties that they 
manage and the responsibilities they assume that can be graded under 
PHAS. All RMCs and DF-RMCs are subject to the requirements of this 
part.
    (2) AMEs are not issued PHAS grades. The performance of the AME 
contributes to the PHAS grade of the PHA or PHAs for which the AME 
assumed management responsibilities. The PHA shall obtain a 
certification from the AME of the management functions undertaken by 
the AME. The PHA shall include the information regarding the management 
functions undertaken by the AME as part of its own management 
operations certification under subpart D.
    (3) For an RMC, the PHA shall obtain a certified questionnaire from 
the RMC as to the management functions undertaken by the RMC. Following 
verification of the RMC's certification, the PHA shall submit the RMC's 
certified questionnaire along with its own. The RMC's Executive 
Director, Chief Executive Officer, or other responsible party must 
approve its certification.
    (4) A DF-RMC shall submit directly to HUD its certified statement 
concerning the management functions that it has undertaken. The DF-
RMC's Executive Director, Chief Executive Officer, or other responsible 
party must approve the certification prior to submission to HUD.
    (c) PHA responsible entity under ACC, except where DF-RMC assumes 
management operations. (1) Because the PHA and not the RMC or AME is 
responsible to HUD under the ACC, the PHAS grade of a PHA shall be 
based on all of the properties covered by the ACC, including those with 
management operations assumed by an RMC or AME (including a court 
ordered receivership agreement, if applicable).
    (2) A PHA's overall PHAS grade will not be based on properties 
managed by a DF-RMC.
    (d) Implementation of PHAS. The regulations in this part are 
applicable to PHAs with fiscal years ending on and after September 30, 
2003.


Sec.  902.7  Definitions.

    As used in this part:
    Act means the U.S. Housing Act of 1937 (42 U.S.C. 1437 et seq.)
    Adjustment for physical condition and neighborhood environment is 
one

[[Page 6274]]

letter grade increase in the property grade. The letter grade increase, 
however, shall not result in a property grade of more than an A.
    Alternative management entity (AME) is a receiver, private 
contractor, private manager, or any other entity that is under contract 
with a PHA, under a Regulatory or Operating Agreement with a PHA, or 
that is otherwise duly appointed or contracted (for example, by court 
order or agency action) to manage all or part of a PHA's operations.
    Annual Contributions Contract (ACC) means the written contract 
between HUD and a PHA under which HUD agrees to provide funding for a 
program under the Act and the PHA agrees to comply with HUD 
requirements for the program.
    Assessed fiscal year is the PHA fiscal year that is being assessed 
under the PHAS.
    Assistant Secretary means the Assistant Secretary for Public and 
Indian Housing.
    Average number of days non-emergency work orders were active is 
calculated:
    (1) By dividing the total of--
    (i) The number of days in the assessed fiscal year it takes to 
close active non-emergency work orders that were carried over from the 
previous fiscal year;
    (ii) The number of days it takes to complete non-emergency work 
orders issued and closed during the assessed fiscal year; and
    (iii) The number of days all active non-emergency work orders were 
open in the assessed fiscal year, but not completed;
    (2) By the total number of non-emergency work orders that were used 
in the calculation of paragraphs (1)(i), (ii) and (iii) of this 
definition.
    Certification review means the HUD on-site property review of the 
exigent health and safety deficiencies observed in the property 
inspection against the PHA's certification that these deficiencies have 
been corrected.
    Days means calendar days unless otherwise specified.
    Decent, safe, sanitary and in good repair (DSS/GR) is HUD's 
standard for acceptable basic housing conditions and the level to which 
a PHA is to maintain its public housing.
    Deficiency means any PHAS indicator, sub-indicator, or component 
for which the PHA has received a PHAS grade of F. In the context of 
PHAS Indicator 1, deficiency is an observed physical condition 
of an inspectable item that is recorded during a physical condition 
inspection. Examples of deficiencies are a hole in the wall or a 
damaged refrigerator in the kitchen (see Sec.  902.24).
    Entity-wide means all programs and activities regardless of funding 
source (federal and non-federal) of a PHA. The determination of entity-
wide shall be made in accordance with generally accepted accounting 
principles (GAAP) authoritative literature.
    Family self-sufficiency (FSS) program means the program established 
by a PHA within its jurisdiction to promote self-sufficiency among 
participating families, including the provision of supportive services 
to these families, as authorized by section 23 of the Act.
    Improvement Plan is a document developed by a PHA that sets forth 
the required actions to be taken, including timetables, to correct 
deficiencies in any of the PHAS indicators, sub-indicators and 
components identified during the PHAS assessment. An Improvement Plan 
may be required when a Memorandum of Agreement (MOA) is not required.
    Memorandum of Agreement is a binding contractual agreement between 
a PHA and HUD that is required for each Grade F PHA as described in 
this subpart. The MOA sets forth target dates, strategies, and 
incentives for improving management performance, and provides sanctions 
if improved performance does not result.
    Memorandum of Understanding (MOU) is a binding agreement by and 
among a PHA and other parties outlining activities, responsibilities, 
and timelines for social services and property management and 
maintenance services.
    PIH-REAC means HUD's Office of Public and Indian Housing Real 
Estate Assessment Center.
    Property is a project or development with a separate identifying 
project number.
    Reduced average number of days non-emergency work orders were 
active during the previous three years is a comparison of the average 
time non-emergency work orders were active in the assessed fiscal year 
to the average number of days non-emergency work orders were active in 
the fiscal year two years prior to the assessed fiscal year. It is 
calculated by subtracting the average number of days non-emergency work 
orders were active in the assessed fiscal year from the average number 
of days non-emergency work orders were active in the earlier year. If a 
PHA elects to certify to the reduction of the average time non-
emergency work orders were active during the previous three years, the 
PHA shall retain justifying documentation to support its certification 
for HUD review as described in subpart F.
    Self-sufficiency means that an FSS family is no longer receiving 
Section 8, public or Indian housing assistance, or any federal, state, 
or local rent or homeownership subsidies or welfare assistance. 
Achievement of self-sufficiency, although an FSS program objective, is 
not a condition for receipt of the FSS account funds.
    Unit months available is the total number of units managed by a PHA 
multiplied by 12 (adjusted by new units entering a PHA's public housing 
stock during the assessed fiscal year) exclusive of units months vacant 
due to demolition, conversion, ongoing modernization, and units 
approved for non-dwelling purposes.
    Unit months leased is the actual number of months each unit was 
rented during the fiscal year based on the PHA's tenant rent rolls or 
Housing Assistant Payment (HAP) records.
    Work order deferred to the Capital Fund Program is any work order 
that is combined with similar work items under the PHA's Capital Fund 
Program or other PHA capital improvements program and is completed 
within the assessed fiscal year, or shall be completed in the following 
fiscal year when there are fewer than three months remaining before the 
end of the assessed fiscal year from the time the work order was 
generated.


Sec.  902.9  PHAS grading.

    (a) Overall PHAS grade. Each PHA will receive an overall PHAS grade 
of A, B, C, D, or F. Sub-indicators and components within each of the 
four PHAS indicators are graded individually, and the grades for the 
sub-indicators and components are used to determine a single grade for 
each of the four PHAS indicators. Then, the four indicator grades are 
combined to determine a PHA's final overall PHAS grade.
    (b) Indicator grades. The overall PHAS grade is derived from a 
weighted average of grade values for the four indicators as follows:
    (1) Physical Condition Indicator 1--Weighted 30 percent of 
the overall PHAS grade. The PHA's grade is based on the results of the 
physical inspections of PHA properties performed by contract inspectors 
using HUD's Uniform Physical Condition Standards (UPCS) inspection 
protocol. The results of the inspections are electronically submitted 
to HUD.
    (2) Financial Condition Indicator 2--Weighted 30 percent 
of the overall PHAS grade. The PHA's grade is based on year-end 
financial information,

[[Page 6275]]

prepared in accordance with GAAP, which is electronically submitted to 
HUD. All PHAs that meet the federal assistance threshold set forth in 
the Single Audit Act and the Office of Management and Budget (0MB) 
Circular A-133 (see 24 CFR 84.26) also submit year-end audited 
financial information. The audited information is transmitted to HUD 
electronically after the independent public accountant (IPA) or 
certified public accountant (CPA) certifies or attests to the accuracy 
of the financial information.
    (3) Management Operations Indicator 3--Weighted 30 percent 
of the overall PHAS grade. The PHA's grade is based on the management 
certification that is electronically submitted to HUD. The 
certification is approved by PHA Board resolution and signed and 
attested to by the Executive Director. In accordance with Sec.  902.63, 
appropriate sanctions for false certification shall be imposed, 
including civil penalties, limited denial of participation, suspension, 
or debarment of the signatories.
    (4) Resident Service and Satisfaction Indicator 4--
Weighted 10 percent of the overall PHAS grade. The PHA's grade is based 
on the responses to the resident survey that is conducted by a third 
party administrator.
    (c) Grading procedures. (1) The grades for each PHAS indicator are 
calculated in accordance with the grading procedures described in the 
grading notices published separately in the Federal Register. The PHAS 
grading notices, with their respective appendices, are:
    (i) Public Housing Assessment System (PHAS); Changes to the PHAS; 
Introduction to PHAS Grading;
    (ii) Physical Condition Grading Process;
    (iii) Financial Condition Grading Process;
    (iv) Management Operations Grading Process; and
    (v) Resident Service and Satisfaction Grading Process.
    (2) HUD will publish for comment any significant proposed 
amendments to the notices. After comments have been considered, HUD 
will publish a notice adopting a final notice or amendment. The PHAS 
grading notices currently in effect are posted on the PIH-REAC Internet 
site at http://www.hud.gov/reac or may be obtained from the PIH-REAC 
Technical Assistance Center at 888-245-4860 (this is a toll-free 
number).


Sec.  902.10  PHAS designation.

    All PHAs shall receive a designation. The designation is based on 
the overall PHAS grade and the four indicator grades as set forth 
below.
    (a) Grade A PHA, Grade B PHA, and Grade C PHA. A PHA's overall PHAS 
grade is its designation if none of its indicator grades are less than 
a grade of C.
    (1) Grade A PHAs are eligible for incentives that include relief 
from reporting and other requirements, as described in Sec. Sec.  
902.13 and 902.71.
    (2) Grade B PHAs are eligible for relief as described in Sec.  
902.13.
    (3) Grade B and C PHAs shall be referred to the Hub Office/Program 
Center pursuant to Sec.  902.73 and shall correct all deficiencies.
    (b) Grade D PHAs. A PHA shall be designated a Grade D PHA if at 
least one of the four indicator grades is a grade of D and none of the 
indicator grades is a grade of F.
    (1) Grade D PHAs shall be referred to the Hub Office/Program Center 
pursuant to Sec.  902.73 and shall correct all deficiencies.
    (2) A PHA that is designated a Grade D PHA is at risk of being 
designated a Grade F PHA.
    (c) Grade F PHAs. A PHA shall be designated a Grade F PHA if at 
least one of the four indicator grades is a grade of F.
    (d) Capital Fund Grade F PHA. A PHA that receives a grade of F for 
the Capital Fund sub-indicator under Management Operations Sub-
Indicator 2 (see Sec.  902.42) shall be a Capital Fund Grade F 
PHA. In accordance with section 6(j)(2) of the Act (42 U.S.C. 
1437d(j)(2)), a Capital Fund Grade F PHA is subject to the sanctions in 
section 6(j)(4) of the Act (42 U.S.C. 1437(d)(j)(4)), as appropriate.
    (e) Referral of Grade F PHAs. A Grade F PHA and Capital Fund Grade 
F PHAs shall be referred to the appropriate HUD office for remedial 
action pursuant to Sec.  902.75.


Sec.  902.13  Frequency of PHAS assessments.

    (a) Frequency. The PHA's PHAS designation determines the frequency 
of the PHAS assessments.
    (1) When a PHA is designated a Grade A PHA, the PHA's next 
assessment shall be in three years.
    (2) When a PHA is designated a Grade B PHA, the PHA's next 
assessment shall be in two years.
    (3) When a PHA is designated a Grade C, D, or F PHA, the PHA's next 
assessment shall be the following year.
    (b) Baseline. In the first calendar year after implementation of 
this regulation, all PHAs shall be assessed in accordance with the 
requirements of this part and graded in accordance with the most recent 
grading notices. For PHA's with fiscal years ending September 30, 2003, 
December 31, 2003, March 31, 2004, and June 30, 2004, this PHAS 
assessment shall be the baseline assessment. The baseline assessment 
will determine each PHA's next PHAS assessment. Thereafter, the PHA's 
most recent final overall PHAS grade will determine the intervals 
between PHAS assessments.
    (c) Financial submissions. Notwithstanding the foregoing, a PHA 
shall electronically submit the unaudited and audited financial 
information to HUD every year pursuant to subpart C of this part. HUD 
shall not issue a grade for the unaudited and audited financial 
information in the years that a PHA is not being assessed under PHAS.


Sec.  902.15  Posting and publication of PHAS grades and designations.

    Each PHA and DF-RMC shall post its overall PHAS grade, each of the 
four indicator grades and its designation in appropriate conspicuous 
and accessible locations in its offices within two weeks of receipt of 
the overall grade. In addition, HUD shall post every PHA's and DF-RMC's 
overall PHAS grade, indicator grades, and designation on the PIH-REAC 
Internet site.

Subpart B--PHAS Indicator 1: Physical Condition


Sec.  902.20  Physical condition assessment.

    (a) Method of assessment, generally. The physical condition 
assessment is based on an independent physical inspection of a PHA's 
properties provided by HUD and conducted using HUD's UPCS inspection 
protocol. This assessment determines the extent of a PHA's compliance 
with the DSS/GR standards.
    (b) Method of transmission. After the inspection is completed, the 
inspector transmits the results to HUD where the results are verified 
for accuracy and then graded in accordance with the procedures in this 
subpart. The PHA's property inspection reports for the assessed fiscal 
year are used to determine the PHA's physical condition grade under 
this subpart.
    (c) Frequency of inspections. HUD will conduct a physical 
inspection of PHA properties only for the fiscal years for which the 
PHA is assessed under this part.
    (d) PHA physical inspection requirements. The HUD-conducted 
physical inspections required by this part do not relieve the PHA of 
the responsibility to inspect public housing units as provided in 
section 6(f)(3) of the Act (42 U.S.C. 1437d(f)(3)) and Sec.  902.44.
    (e) Compliance with State and local codes. The physical condition 
standards

[[Page 6276]]

in this subpart do not supersede or preempt state and local building 
and maintenance codes with which the PHA's public housing must comply. 
PHAs must continue to adhere to these codes.
    (f) HUD access to PHA properties. All PHAs are required by the ACC 
to provide the Government with full and free access to all facilities 
in its property(ies). All PHAs are required to provide HUD or its 
representative with access to its property(ies), and all units and 
appurtenances in order to permit physical inspections, certification 
reviews, and quality assurance reviews under this part. Access to the 
units shall be provided whether or not the resident is home or has 
installed additional locks for which the PHA did not obtain keys. In 
the event that the PHA fails to provide access as required by HUD or 
its representative, the PHA shall be given a zero and grade of F for 
the property or properties involved which shall be reflected in the 
PHAS Indicator 1 grade and the overall PHAS grade.


Sec.  902.23  Inspectable areas.

    (a) General. The physical inspections address five major physical 
areas of public housing: site, building exteriors, building systems, 
dwelling units, and common areas. The physical inspections also 
identify health and safety considerations (including exigent health and 
safety (EHS) considerations). The inspections focus on acceptable basic 
housing conditions, not the adornment, decor, or other cosmetic 
appearance of the properties.
    (b) Major inspectable areas. The five major inspectable areas of 
public housing are the following:
    (1) Site. The site includes components such as fencing and 
retaining walls, grounds, lighting, mailboxes, signs (such as those 
identifying the property or areas of the property), parking lots/
driveways, play areas and equipment, refuse disposal, roads, storm 
drainage, and walkways. The site must be free of health and safety 
hazards and be in good repair. The site must not be subject to material 
adverse conditions, such as abandoned vehicles, dangerous walks or 
steps, poor drainage, septic tank back-ups, sewer hazards, excess 
accumulations of trash, vermin or rodent infestation, or fire hazards.
    (2) Building exterior. Each building on the site must be 
structurally sound, secure, habitable, and in good repair. The 
building's exterior components such as doors, fire escapes, 
foundations, lighting, roofs, walls and windows, where applicable, must 
be free of health and safety hazards, operable, and in good repair.
    (3) Building systems. The building's systems include components 
such as domestic water, electrical system, elevators, emergency power, 
fire protection, HVAC, and sanitary system. Each building's systems 
must be free of health and safety hazards, functionally adequate, 
operable, and in good repair.
    (4) Dwelling units. (i) Each dwelling unit within a building must 
be structurally sound, habitable, and in good repair. All areas and 
aspects of the dwelling unit (for example, the unit's bathroom, call-
for-aid, ceiling, doors electrical systems, floors, hot water heater, 
HVAC (where individual units are provided), kitchen, lighting, outlets/
switches, patio/porch/balcony, smoke detectors, stairs, walls, and 
windows) must be free of health and safety hazards, functionally 
adequate, operable, and in good repair.
    (ii) Where applicable, the dwelling unit must have hot and cold 
running water, including an adequate source of potable water.
    (iii) If the dwelling unit includes its own sanitary facility, it 
must be in proper operating condition, usable in private, and adequate 
for personal hygiene and the disposal of human waste.
    (iv) The dwelling unit must include at least one battery-operated 
or hard-wired smoke detector in proper working condition on each level 
of the unit.
    (5) Common areas. The common areas must be structurally sound, 
secure, and functionally adequate for the purposes intended. The common 
areas include components such as basement/garage/carport, restrooms, 
closets, utility, mechanical, community rooms, day care, halls/
corridors, stairs, kitchens, laundry rooms, office, porch, patio, 
balcony, and trash collection areas, if applicable. The common areas 
must be free of health and safety hazards, operable, and in good 
repair. All common area ceilings, doors, floors, HVAC, lighting, 
outlets/switches, smoke detectors, stairs, walls, and windows, to the 
extent applicable, must be free of health and safety hazards, operable, 
and in good repair.
    (c) Health and safety concerns. All areas and components of PHA 
properties must be free of health and safety hazards. Health and safety 
hazards include, but are not limited to, air quality, electrical 
hazards, elevators, emergency/fire exits, flammable materials, garbage 
and debris, handrail hazards, infestation, and lead-based paint. For 
example, the buildings must have fire exits that are not blocked, and 
have handrails that are undamaged and have no other observable 
deficiencies. PHA properties must have no evidence of infestation by 
rats, mice, or other vermin, or of garbage and debris. PHA properties 
must have no evidence of electrical hazards, natural hazards, or fire 
hazards. The dwelling units and common areas must have proper 
ventilation and be free of mold, odor (e.g., propane, natural gas, 
methane gas), or other observable deficiencies. The PHA must comply 
with all regulations and requirements related to the ownership of pets, 
and the evaluation and reduction of lead-based paint hazards, and must 
have all appropriate certifications available for review (see 24 CFR 
part 35).


Sec.  902.24  Physical inspection of PHA properties.

    (a) The inspection, generally. During the physical inspection of a 
property, an inspector inspects a random sample of dwelling units and 
buildings in the PHA's public housing portfolio to determine the extent 
of compliance with HUD's DSS/GR standards. The dwelling units inspected 
in a property are a randomly selected sample of the units in the 
properties. The buildings inspected include all buildings with sampled 
units plus additional buildings, including all common (non-residential) 
buildings.
    (1) Only occupied units shall be inspected as dwelling units. Units 
approved by HUD for non-dwelling purposes, such as daycare or meetings, 
are inspected as common areas. Certain categories of vacant units that 
are not under lease at the time of the physical inspection (e.g., units 
undergoing rehabilitation or extensive repair, vacant units during the 
turnaround period prior to lease-up) shall not be inspected, but shall 
be assessed under the Financial Condition Indicator 2 (subpart 
C).
    (2) The categories of vacant units that are not under lease that 
are not inspected are as follows:
    (i) Units undergoing vacant unit turnaround--vacant units that are 
in the routine process of turnover; i.e., the period between which one 
resident vacates a unit and a new lease takes effect;
    (ii) Units undergoing rehabilitation--vacant units that have 
substantial rehabilitation needs already identified, and for which 
there is an approved implementation plan to address the identified 
rehabilitation needs and the plan is fully funded; and
    (iii) Off-line units--vacant units that have significant 
unanticipated repair requirements, such as fire damage, that prevent 
the units from being occupied after a normal period of time (considered 
to be between 5 and 7 days)

[[Page 6277]]

and which are not included in an approved rehabilitation plan.
    (b) Observed deficiencies. During the inspection of a property, the 
inspector looks for deficiencies in each inspectable item within the 
inspectable areas. For example, the inspector looks for holes 
(deficiencies) in the walls (item) of a dwelling unit (area).
    (c) Health and safety deficiencies and EHS deficiencies.
    (1) Health and safety deficiencies. The PHA is required to promptly 
correct all health and safety deficiencies.
    (2) EHS deficiencies. Before leaving the site, the inspector gives 
the property representative the list of every observed EHS deficiency 
(i.e., every life-threatening health and safety deficiency). The 
property representative acknowledges receipt of the list of the 
observed deficiencies by signature. The PHA must immediately correct or 
remedy all EHS deficiencies cited in the deficiency report and the 
property inspection report within 24 hours. In addition, the PHA must 
certify, as directed by HUD, that all EHS deficiencies were corrected 
or remedied within 24 hours.
    (d) Definitions for grading. The following definitions apply to the 
physical condition grading process in this subpart:
    Base grade means the initial property grade derived from the number 
of livability deficiencies.
    Deficiencies means the specific problems, such as a hole in a wall 
or a damaged refrigerator in the kitchen, that can be recorded for the 
inspectable items.
    Deficiency Classification Summary Document refers to the Deficiency 
Classification Summary Document that is included as Appendix 2 to the 
PHAS notice on the Interim Physical Condition Scoring Process published 
in the Federal Register on November 26, 2001.
    This document is also available from the Real Estate Assessment 
Center, 1280 Maryland Ave., SW., Suite 800, Washington, DC 20410. This 
document shows the grading class for each severity level of each 
deficiency listed in the Dictionary of Deficiency Definitions.
    Dictionary of Deficiency Definitions (``Dictionary'') refers to the 
Dictionary of Deficiency Definitions document that is included as 
Appendix 2 to the PHAS Notice on the Physical Condition Grading 
Process. The Dictionary lists each deficiency that may be observed, 
defines each deficiency, and sets forth the severity levels for each 
deficiency under this subpart.
    Grading class is a group of deficiencies that are treated alike. 
Each deficiency within a grading class has the same type of impact on a 
property grade. There are three grading classes:
    (1) Livability: deficiencies that have a major impact on livability 
for residents (e.g., toilet not working);
    (2) EHS: deficiencies that are life-threatening and require 
immediate attention or remedy. This category includes all of the 
deficiencies for which the PHA receives a notice at the end of the 
physical inspection (e.g., exposed wires); and
    (3) Other: deficiencies that have little or no impact on livability 
for residents (e.g., small hole in an interior door) but are a valuable 
management tool because they provide information on the condition of 
the property.
    Inspectable areas (or area) means any of the five major components 
of the property that are inspected. They are: site; building exteriors; 
building systems; dwelling units; and common areas.
    Inspectable item means the individual parts, such as walls, 
kitchens, bathrooms, and other things, to be inspected in an 
inspectable area. The number of inspectable items varies for each 
inspectable area.
    Livability is the concept of grading the physical condition of PHA 
properties that focuses on the impact of the deficiencies on the 
residents. The severity levels of each deficiency in the Dictionary 
have been classified into one of three grading classes: livability, EHS 
or other.
    PHAS Indicator #1 grade is a letter grade (A, B, C, D, or F) that 
corresponds to the weighted average of all of the property grades, 
reflecting the physical condition of all of a PHA's properties.
    Property grade is a letter (A, B, C, D, or F), based on counts of 
deficiencies in grading classes, that reflects the physical condition 
of a property.
    Property livability points mean a value derived from the number of 
deficiencies in the livability grading class that is used to assign a 
base grade to a PHA property.
    Reported grade means the grade reported to a PHA, including any 
change in the base grade due to observed EHS deficiencies. Deficiencies 
in grading class ``other'' are recorded, but do not affect the base 
grade or the reported grade.
    Severity means one of three levels (i.e., level 1, level 2, and 
level 3) that reflects the extent of the damage or problem associated 
with each deficiency. The severity levels for each deficiency are set 
forth in the Dictionary. The Dictionary also sets forth the specific 
definitions for each severity level.
    (e) Dictionary and Deficiency Classification. HUD shall publish for 
comment any significant proposed amendments to the Dictionary and the 
Deficiency Classification Summary Document. After comments have been 
considered, HUD shall publish a notice adopting the final Dictionary 
and Document or the amendments. The Dictionary and the Deficiency 
Classification Summary Document that are currently in effect can be 
found at HUD's Internet site at http://www.hud.gov/reac or obtained 
from the PIH-REAC Technical Assistance Center at 888-245-4860 (this is 
a toll free number).
    (f) Compliance with civil rights/nondiscrimination requirements. 
HUD reviews certain elements during the physical inspection to 
determine possible indications of noncompliance with the Fair Housing 
Act (42 U.S.C. 3601-19) and section 504 of the Rehabilitation Act of 
1973 (29 U.S.C. 794). All Fair Housing Act and Rehabilitation Act 
observations recorded by an inspector are classified as ``other'' 
deficiencies under livability and are not included in the property 
grade. All information is provided to HUD's Office of Fair Housing and 
Equal Opportunity for further review.


Sec.  902.25  Adjustments to physical condition property grade.

    (a) Adjustment for physical condition and neighborhood environment. 
In accordance with section 6(j)(1)(I)(2) of the Act (42 U.S.C. 
1437d(j)(1)(I)(2)), the overall physical condition grade for a property 
shall be adjusted upward to the extent that negative conditions are 
caused by situations outside the control of the PHA. The intent of this 
adjustment is to avoid penalizing the PHA through appropriate 
application of the adjustment.
    (b) One-letter grade adjustment. A PHA shall receive a one-letter 
grade adjustment (i.e., increase) in the property grade if the property 
satisfies the criteria for either physical condition or neighborhood 
environment or for both. To be eligible for this adjustment, the PHA 
must certify that the property meets the definitions of physical 
condition and/or neighborhood environment. An adjustment made under 
this section will be an adjustment to an individual property grade 
determined by HUD on a case by case basis.
    (c) Definitions. Definitions and application of physical condition 
and neighborhood environment factors are:
    (1) Physical condition applies to documented structural or design 
defects in a property that a PHA cannot correct.

[[Page 6278]]

    (2) Neighborhood environment applies to documented conditions 
within the immediate surrounding neighborhood that adversely impact a 
property's physical condition such as:
    (A) A landfill;
    (B) Flood plain; or
    (C) Other environmentally hazardous areas.
    (d) Certification to an adjustment for physical condition and/or 
neighborhood environment. The PHA certifies to the adjustment for 
physical condition and/or neighborhood environment as part of its 
management operations submission.
    (e) Maintenance of supporting documentation. A PHA shall maintain 
supporting documentation (pursuant to Sec.  902.63(c)) to show how it 
determined that the property's grade is subject to adjustment under 
this section.
    (1) If the basis for adjustment was neighborhood environment, the 
PHA shall have on file the appropriate documentation supporting the 
adjustment. Properties that fall into this category but which have 
already been removed from consideration for other reasons (permitted 
exemptions and modifications and/or exclusions) shall not be counted in 
this calculation.
    (2) For the physical condition adjustment, a PHA must maintain 
documentation showing the structural or design defects. A PHA shall 
also maintain documentation showing that any property exempted for 
other reasons was not included in the calculation.


Sec.  902.26  Database adjustments to physical condition assessments.

    (a) Generally. HUD may review the results of a PHA's physical 
inspection and make adjustments to the property grade based on certain 
circumstances such as:
    (1) Factors not reflected or inappropriately reflected in the 
physical property grade;
    (2) Adverse conditions beyond the PHA's control; and
    (3) Modernization work in progress.
    (b) Adjustments for factors not reflected or inappropriately 
reflected in the property grade. (1) Factors not reflected or 
inappropriately reflected in the property grade include inconsistencies 
between local code requirements and the HUD UPCS physical inspection 
protocol (24 CFR part 5, subpart G); conditions which are permitted by 
local variance or license or which are preexisting physical features 
that do not conform to, or are inconsistent with, HUD's UPCS physical 
inspection protocol; or the inspector grading the PHA for elements 
(e.g., roads, sidewalks, mail boxes, resident-owned appliances, etc.) 
that the PHA does not own and is not responsible for maintaining, and 
for which it has notified the proper authorities regarding the 
deficient structure.
    (2) The PHA may request an adjustment due to these circumstances 
through the applicable Hub Office/Program Center. The request shall be 
in writing and include appropriate proof of the reasons for the unusual 
or incorrect result. A PHA may submit the request for this adjustment 
either prior to or after the physical inspection has been concluded. If 
the request is made after the conclusion of the physical inspection, 
the request shall be made within 15 days of issuance of the Physical 
Inspection Report and grade for the property. Based on the 
recommendation of the applicable HUD Hub Office/Program Center 
following its review of the PHA's documentation, HUD may determine that 
a reinspection and/or re-grading of the PHA's property is necessary.
    (c) Adjustments for adverse conditions beyond the PHA's control. 
Under certain circumstances, HUD may determine that certain 
deficiencies that adversely and significantly affect the property 
grades of the PHA were caused by circumstances beyond the control of 
the PHA. The correction of these conditions, however, remains the 
responsibility of the PHA.
    (1) Adverse conditions beyond the PHA's control may include, but 
are not limited to, damage caused by third parties (such as a private 
entity or public entity undertaking work near a public housing property 
that results in damage to the property) or natural disasters.
    (2) A PHA may request an adjustment due to these circumstances 
through the applicable HUD Hub Office/Program Center. The request shall 
be submitted within 15 days of the issuance of the Physical Inspection 
Report and grade for the property to the PHA and shall be accompanied 
by a certification that all deficiencies identified in the original 
report have been corrected. Based on the recommendation of the 
applicable HUD Hub Office/Program Center after its review of the PHA's 
evidence or documentation, HUD may determine that a reinspection and/or 
re-grading of the PHA's property is necessary.
    (d) Adjustments for modernization work in progress. HUD may 
determine that an occupied dwelling unit or other areas of a PHA 
property, subject to physical inspection under this subpart, which are 
undergoing modernization work in progress require an adjustment to the 
physical condition grade.
    (1) Occupied dwelling units or other areas of a PHA property 
undergoing modernization are not exempt from physical inspection. All 
elements of the dwelling units or of the other areas of the PHA 
property that are subject to inspection and are not undergoing 
modernization at the time of the inspection (even if modernization is 
planned) shall be subject to HUD's physical inspection protocol without 
adjustment. For those elements of the dwelling units or of the property 
that are undergoing modernization, deficiencies shall be noted in 
accordance with HUD's physical inspection protocol, but the PHA may 
request adjustment of the physical condition grade as a result of 
modernization work in progress.
    (2) The PHA may request an adjustment due to modernization work in 
progress through the applicable HUD Hub Office/Program Center. The 
request shall be in writing and include supporting documentation of the 
modernization work underway at the time of the physical inspection. A 
PHA may submit the request for this adjustment either prior to or after 
the physical inspection has been concluded. If the request is made 
after the conclusion of the physical inspection, the request shall be 
made within 15 days of issuance of the Physical Inspection Report and 
grade for the property. Based on the recommendation of the applicable 
HUD Hub Office/Program Center, HUD may determine that a reinspection 
and/or re-grading of the PHA's property is necessary.


Sec.  902.27  Physical inspection report.

    (a) Report generally. Following the physical inspection of each 
property and the determination of the property grade under this 
subpart, the PHA shall receive an Inspection Summary Report. The 
Inspection Summary Report allows the PHA to see all observed 
deficiencies by inspectable area, and the impact of livability and EHS 
deficiencies on the property grade.
    (b) Report contents. The Inspection Summary Report includes the 
following items:
    (1) A list of the livability, EHS, and other deficiencies observed;
    (2) The health and safety deficiencies for each of the five 
inspectable areas; a listing of all observed smoke detector 
deficiencies; and a projection of the total number of health and safety 
deficiencies that the inspector potentially would see in an inspection 
of all buildings and all units;
    (3) The overall property grade;
    (4) The values of the livability points; and
    (5) The reported property grade.

[[Page 6279]]

Sec.  902.28  Overall physical condition indicator grade.

    (a) Property grade. To determine a property's base grade, all 
livability deficiencies reported for dwelling units, buildings (which 
combines the inspectable areas of building exterior, building systems 
and common areas), and site are counted. To quantify the impact of the 
cited deficiencies on the inspectable areas, values called ``livability 
points'' are calculated separately for dwelling units, buildings 
(adjusted for the number of units in each building and to account for 
any sampling of the buildings), and site. The livability points are 
then combined into overall livability points for the property, with 
dwelling units, buildings, and site each contributing 60 percent, 30 
percent, and 10 percent, respectively. Property livability points are 
translated into the base grade as specified in the Physical Condition 
Grading Process notice. When there are no EHS deficiencies cited, the 
base grade is the property's reported grade.
    (b) Impact of EHS deficiencies on a property grade. If at least one 
EHS deficiency is cited, other than for smoke detectors, then the 
reported grade will be one grade lower than the base grade (i.e., A 
becomes B, B becomes C, C becomes D, D becomes F, and F remains as F).
    (c) Correction of EHS deficiencies. When a PHA corrects all of the 
EHS deficiencies on a property inspection report and certifies to HUD 
that they have been corrected pursuant to section Sec.  902.24 (c), the 
property grade will revert to the base grade. If an EHS certification 
review later shows that all of the EHS deficiencies to which the PHA 
certified were not corrected, then the PHA's property grade will be 
reduced one-letter grade below the reported property grade and the 
PHA's overall physical inspection grade also may be reduced, with F 
being the lowest possible grade.
    (d) PHAS Indicator #1 grade. The PHAS Indicator 1 grade 
for a PHA is based on the grades for all the properties in a PHA's 
portfolio. To determine the PHAS Indicator 1 grade, each 
property grade is assigned a numerical value. Then a weighted average 
of property grade values is calculated with weights equal to the number 
of units in the property divided by the total number of units in the 
PHA. This PHAS Indicator 1 grade is the letter grade 
corresponding to the weighted average of property grade values.


Sec.  902.29  Threshold.

    When a PHA receives a grade of F under this indicator, the PHA 
shall be designated a Grade F PHA. When a PHA receives a grade of D 
under this indicator, the PHA shall be designated a Grade D PHA.

Subpart C--PHAS Indicator 2: Financial Condition


Sec.  902.30  Financial condition assessment.

    (a) Annual financial filing dates. Under this indicator, PHAs shall 
submit unaudited and audited financial information to HUD on an annual 
basis.
    (1) Unaudited financial information filing date. The unaudited 
financial information shall be submitted to HUD annually, no later than 
two months after the end of the PHA's fiscal year in accordance with 
Uniform Financial Reporting Standards (see 24 CFR part 5, subpart H).
    (2) Audited financial information filing date. The audited 
financial information shall be submitted no later than nine months 
after the end of the PHA's fiscal year, in accordance with the Single 
Audit Act and OMB Circular A-133 (see 24 CFR 84.26). A PHA that has an 
audit conducted, but is not subject to the Single Audit Act, shall also 
submit audited information no later than nine months after the end of 
the PHA's fiscal year.
    (b) Certification or attestation. Prior to the electronic 
submission of the PHA's audited statement, the PHA's IPA or CPA shall 
certify or attest that the financial information being submitted 
electronically accurately reflects the audited ``hard copy'' financial 
information.
    (c) Annual financial information. The financial information shall 
be:
    (1) Submitted on an entity-wide basis;
    (2) Prepared in accordance with GAAP; and
    (3) Submitted electronically in the format prescribed by HUD.
    (d) Components of Financial Condition Indicator. A PHA's financial 
condition shall be assessed on the basis of six components described in 
Sec.  902.35. The six components are:
    (1) Current Ratio;
    (2) Number of Months Expendable Fund Balance;
    (3) Tenant Receivables Outstanding;
    (4) Occupancy Loss;
    (5) Expense Management/Utility Consumption; and
    (6) Net Income or Loss Divided by the Expendable Fund Balance.
    (e) Annual submission requirement. A PHA shall electronically 
submit its unaudited and audited financial information to HUD every 
year. In accordance with Sec.  902.13, HUD will not grade the unaudited 
and audited financial information in the years that a PHA is not being 
assessed under PHAS.


Sec.  902.33  Financial condition grading.

    (a) Under PHAS Indicator 2, HUD will determine a grade 
based on the calculated values of the six financial condition 
components, and the results of the audit.
    (b) Each financial condition component value will be converted to a 
grade. The grade from each financial condition component will then be 
combined to create the overall financial condition assessment grade. A 
PHA's grade for a financial condition component depends upon both the 
calculated value of the financial condition components and the PHA's 
peer group. A PHA's peer group will be determined based on a PHA's size 
and regional location. HUD will use a region as part of the peer group 
only if a peer group based solely on size would not allow an equitable 
assessment. A PHA's size will be based on the number of public housing, 
Section 8, and other units the PHA operates.
    (c) HUD may adjust a PHA's Financial Conditioner Indicator grade 
after receipt of the PHA's audited submission for the assessed fiscal 
year. Any adjustment to the Financial Conditioner Indicator grade 
(i.e., increase or decrease) shall result in a corresponding adjustment 
to the PHA's final overall PHAS grade. In addition, if there is a 
significant difference between the unaudited and audited submissions, a 
PHA's financial condition grade and final overall PHAS grade shall be 
adjusted (i.e., a letter grade reduction) as described in the PHAS 
notice on the Financial Condition Grading Process. Findings, 
qualifications, or other conditions reported as the result of an audit 
may also reduce the Financial Condition grade by one or more letter 
grades. The letter grade reductions are based on the severity of the 
finding, qualifications, or reported condition, as described in the 
PHAS notice on the Financial Condition Grading Process.


Sec.  902.35  Financial condition components.

    The six Financial Condition Indicator components are:
    (a) Current Ratio. This component is calculated by dividing the 
current assets by current liabilities. This component measures a PHA's 
liquidity position. This component is calculated on an entity-wide 
basis.
    (b) Number of Months Expendable Fund Balance. This component is 
calculated by dividing the expendable fund balance by the monthly 
operating expenses. This component measures the adequacy of the PHA's 
reserves. This component is calculated on an entity-wide basis.

[[Page 6280]]

    (c) Tenant Receivables Outstanding. This component is calculated by 
dividing the gross tenant receivables by the amount of tenant rents 
collected during the assessed fiscal year. This component measures a 
PHA's ability to collect rent. This component is calculated on an 
entity-wide basis.
    (d) Occupancy Loss. This component is calculated by dividing the 
unit months leased by the unit months available, and then subtracting 
that number from one. This component measures the ability of a PHA to 
maximize rental income. This component is calculated on all programs, 
excluding any units associated with the Section 8 Housing Choice 
Vouchers, Section 8 Rental Vouchers and Section 8 Certificates 
programs.
    (e) Expense Management/Utility Consumption. This component is 
calculated by dividing key expenses, including the expense for utility 
consumption, by months leased. This component measures the ability of a 
PHA to maintain utility expenses at a reasonable level relative to its 
peers. This component is calculated only on the low rent program.
    (f) Net Income or loss divided by the Expendable Fund Balance. This 
component is calculated by dividing net income or loss by the 
expendable fund balance. This component measures how the results of the 
PHA's operations for the assessed fiscal year affect the PHA's 
viability. This component is calculated on an entity-wide basis.


Sec.  902.37  Threshold.

    When a PHA receives a grade of F under this indicator, the PHA 
shall be designated a Grade F PHA. When a PHA receives a grade of D 
under this indicator, the PHA shall be designated a Grade D PHA.

Subpart D--PHAS Indicator 3: Management Operations


Sec.  902.40  Management operations assessment and performance 
standards.

    (a) Management certification filing date. Under this indicator, a 
PHA shall electronically submit to HUD its annual management operations 
information no later than two months after the end of the assessed 
fiscal year.
    (b) Board resolution and attestation. The management operations 
certification shall be approved by a resolution of the PHA Board and 
signed and attested to by the Executive Director. In accordance with 
Sec.  902.63, appropriate sanctions for false certification shall be 
imposed, including civil penalties, limited denial of participation, 
suspension, or debarment of the signatories.
    (c) Sub-indicators of Management Operations Indicator. The PHA's 
management operations shall be assessed on the basis of eight sub-
indicators described in the sections below. Five sub-indicators have 
two or more components. Two sub-indicators have specific exemptions. 
The eight sub-indicators are:
    (1) Vacant unit turnaround time. This sub-indicator has a single 
component and has specific exemptions.
    (2) Capital Fund. This sub-indicator has two components.
    (3) Work orders. This sub-indicator has two components.
    (4) Annual inspection of dwelling units and systems. This sub-
indicator has two components and has specific exemptions.
    (5) Security. This sub-indicator has three components.
    (6) Self-sufficiency. This sub-indicator has four components.
    (7) Income verification. This sub-indicator has a single component.
    (8) Rent calculation. This sub-indicator has a single component.
    (d) Assessed period. The Management Operations certification shall 
include only information for the assessed fiscal year. No information 
is required for and no certification is required during the years a PHA 
is not assessed under this part in accordance with Sec.  902.13(a).
    (e) Audit and HUD review. A PHA's management operations submission 
is subject to the annual IPA or CPA audit required by the Single Audit 
Act and OMB Circular A-133. A PHA's management operations submission 
also is subject to HUD on-site review at any time in accordance with 
Sec.  902.63. A PHA that is unable to provide supporting documentation 
for the information under any of the sub-indicators or components to 
which it certified will receive a zero and a grade of F for the sub-
indicator or component, and its management operations grade and final 
overall PHAS grade will be lowered.


Sec.  902.41  Management operations sub-indicator 1--vacant 
unit turnaround time.

    This sub-indicator measures a PHA's efforts during the assessed 
fiscal year to reduce unit turnaround time, and assesses the adequacy 
of a PHA's system to track unit downtime, make ready time, and lease up 
time.
    (a) Units Exempted. The following two categories of units that are 
not considered available for occupancy are exempted from the 
computation of vacant unit turnaround time.
    (1) Units approved for non-dwelling use. Units approved for non-
dwelling use that are exempt during the assessed fiscal year are HUD-
approved units used to promote self-sufficiency and anti-drug 
activities or for non-dwelling purposes, such as police substations, 
day care centers, public safety activities, or resident job training.
    (2) Vacant units approved for deprogramming. Vacant units approved 
for deprogramming that are exempt during the assessed fiscal year are 
HUD-approved units for demolition and/or disposition, or units that 
have been combined.
    (b) Vacancy days exempted. The vacancy days for units in the 
following two categories shall be exempted from the calculation of 
vacant unit turnaround time in the assessed fiscal year. The two 
categories are:
    (1) Vacancy days associated with vacant units receiving section 
9(d) Capital Funds during the assessed fiscal year. Vacancy days 
associated with a vacant unit prior to the time the unit meets the 
conditions of being a unit receiving section 9(d) Capital Funds, and 
vacancy days associated with a vacant unit after construction work has 
been completed or after the time period for placing the vacant unit 
under construction has expired, shall not be exempted.
    (2) Vacancy days associated with units vacant during the assessed 
fiscal year due to circumstances and actions beyond a PHA's control. 
Circumstances and actions beyond a PHA's control may include:
    (i) A legally enforceable court order or settlement agreement 
resulting from litigation during the assessed fiscal year;
    (ii) Federal law or state law, not preempted by federal law, or the 
implementing regulations;
    (iii) Natural disasters during the assessed fiscal year; or
    (iv) Vacant units during the assessed fiscal year that have 
sustained casualty damage and are pending resolution of insurance 
claims or settlements, but only until the insurance claims are settled.
    (c) Supporting documents for section 9(d) Capital Fund units. A PHA 
shall maintain information to support its determination of vacancy days 
associated with a vacant unit that meets the conditions of being a unit 
receiving section 9(d) Capital Funds under paragraph (b)(1) of this 
section. The PHA shall maintain:
    (1) The date on which the unit met the conditions of being a vacant 
unit receiving section 9(d) Capital Funds; and
    (2) The date on which construction work was completed or the time 
period

[[Page 6281]]

for placing the vacant unit under construction expired.
    (d) Supporting documents for vacancies beyond PHA's control. A PHA 
shall maintain information to support its determination of vacancy days 
associated with units vacant due to circumstances and actions beyond 
the PHA's control under paragraph (b)(2) of this section. This 
supporting information is subject to review and may be requested for 
verification purposes at any time by HUD. The PHA shall, at a minimum, 
maintain:
    (1) The date on which the unit met the conditions of being a unit 
vacant due to circumstances and actions beyond a PHA's control;
    (2) Documentation identifying the specific conditions that 
distinguish the unit as a unit vacant due to circumstances and actions 
beyond a PHA's control;
    (3) A description or list of the actions taken by a PHA to 
eliminate or mitigate these conditions; and
    (4) The date on which the unit ceased to meet such conditions and 
became an available unit.
    (e) Ratings for vacant unit turnaround time.
    (1) Grade A: When the average number of days during the assessed 
fiscal year between the time a unit is vacated and a new lease takes 
effect for units reoccupied is less than or equal to 5 days.
    (2) Grade B: When the average number of days during the assessed 
fiscal year between the time a unit is vacated and a new lease takes 
effect for units reoccupied is greater than 5 days and less than or 
equal to 10 days.
    (3) Grade C: When the average number of days during the assessed 
fiscal year between the time a unit is vacated and a new lease takes 
effect for units reoccupied is greater than 10 days and less than or 
equal to 20 days.
    (4) Grade D: When the average number of days during the assessed 
fiscal year between the time a unit is vacated and a new lease takes 
effect for units reoccupied is greater than 20 days and less than or 
equal to 30 days.
    (5) Grade F: When the average number of days during the assessed 
fiscal year between the time a unit is vacated and a new lease takes 
effect for units reoccupied is greater than 30 days.


Sec.  902.42  Management operations sub-indicator 2--Capital 
Fund.

    This sub-indicator grades the funds provided to a PHA from the 
Capital Fund under section 9(d) of the Act (42 U.S.C. 1437g(9)(d)) that 
during the assessed fiscal year remain unobligated by a PHA after two 
years beyond the date on which the funds became available to a PHA for 
obligation in the case of modernization, or the date on which the 
agency accumulates adequate funds to undertake modernization, 
substantial rehabilitation, or new construction of units, and/or remain 
unexpended by a PHA after four years beyond the date on which the funds 
became available to a PHA for obligation. Funds from the Capital Fund 
under section 9(d) of the Act (42 U.S.C. 1437g(d)(2)) do not include 
HOPE VI program funds and Vacancy Reduction program funds.
    (a) Applicability. This sub-indicator is not applicable for PHAs 
that choose not to receive Capital Funds under section 9(d) of the Act.
    (b) Components of Capital Fund sub-indicator. The two components of 
the Capital Fund sub-indicator are:
    (1) Unexpended funds over four years old; and
    (2) Timeliness of fund obligation.
    (c) Grades for Capital Fund sub-indicator.
    (1) Component 1. Unexpended funds over four years old.
    (i) Grade A: When a PHA has no unexpended funds during the assessed 
fiscal year that are over four years old beyond the date on which the 
funds became available to a PHA for expenditure, or when the Secretary 
has approved a time extension because of litigation, obtaining 
approvals of the federal, state, or local government, complying with 
environmental assessment or abatement requirements, relocating 
residents, or any other reason established by the Secretary by notice 
published in the Federal Register.
    (ii) Grade F: When a PHA has unexpended funds during the assessed 
fiscal year over four years old beyond the date on which the funds 
became available to a PHA for expenditure and is unable to demonstrate 
any of the above conditions.
    (2) Component 2. Timeliness of fund obligation.
    (i) Grade A: When a PHA has no unobligated funds during the 
assessed fiscal year over two years old beyond the date on which the 
funds became available to a PHA for obligation, or the Secretary has 
approved a time extension because of litigation, obtaining approvals of 
the federal, state, or local government, complying with environmental 
assessment or abatement requirements, relocating residents or any other 
reason established by the Secretary by notice published in the Federal 
Register.
    (ii) Grade F: When a PHA has unobligated funds during the assessed 
fiscal year over two years old beyond the fiscal year in which funds 
were obligated by HUD to the PHA and is unable to demonstrate any of 
the above conditions.


Sec.  902.43  Management operations sub-indicator 3--work 
orders.

    This sub-indicator examines the time it takes to complete or abate 
emergency work orders; the average number of days non-emergency work 
orders were active during the assessed fiscal year; and any progress a 
PHA has made during the preceding three fiscal years to reduce the 
period of time non-emergency work orders were active.
    (a) Adequacy of work order system. It is implicit in this sub-
indicator that the PHA have an adequate work order system in terms of 
how a PHA accounts for and controls its work orders, and its timeliness 
in preparing/issuing work orders.
    (b) Grades for work orders.
    (1) Component 1. Emergency work orders.
    (i) Grade A: When at least 99 percent of emergency work orders 
during a PHA's assessed fiscal year were completed or the emergency was 
abated within 24 hours or less.
    (ii) Grade B: When at least 98 percent of emergency work orders 
during a PHA's assessed fiscal year were completed or the emergency was 
abated within 24 hours or less.
    (iii) Grade C: When at least 97 percent of emergency work orders 
during a PHA's assessed fiscal year were completed or the emergency was 
abated within 24 hours or less.
    (iv) Grade D: When at least 96 percent of emergency work orders 
during a PHA's assessed fiscal year were completed or the emergency was 
abated within 24 hours or less.
    (v) Grade F: When less than 96 percent of emergency work orders 
during a PHA's assessed fiscal year were completed or the emergency was 
abated within 24 hours or less.
    (2) Component 2. Non-emergency work orders. The PHA shall 
track all non-emergency work orders that were active during the 
assessed fiscal year (including preventive maintenance work orders). A 
PHA is not required to track non-emergency work orders from the date 
they are deferred for the Capital Fund Program, issued to prepare a 
vacant unit for re-rental, or issued for the performance of cyclical 
maintenance.
    (i) Grade A: When the average number of days non-emergency work 
orders were active during the assessed fiscal year is 7 days or less.
    (ii) Grade B: When the average number of days non-emergency work

[[Page 6282]]

orders were active during the assessed fiscal year is more than 7 days 
and less than or equal to 15 days.
    (iii) Grade C: When a PHA is in one of the following categories:
    (A) The average number of days non-emergency work orders were 
active during the assessed fiscal year is more than 15 days and less 
than or equal to 22 days; or
    (B) The PHA has reduced the average number of days non-emergency 
work orders were active during the assessed fiscal year by at least 15 
days during the past three fiscal years.
    (iv) Grade D: When a PHA is in one of the following categories:
    (A) The average number of days non-emergency work orders were 
active during the assessed fiscal year is more than 22 days and less 
than or equal to 30 days; or
    (B) The PHA has reduced the average number of days non-emergency 
work orders were active during the assessed fiscal year by at least 10 
days during the past three fiscal years.
    (v) Grade F: When the average number of days non-emergency work 
orders were active during the assessed fiscal year is more than 30 
days.


Sec.  902.44  Management operations sub-indicator 4--annual 
inspection of dwelling units and systems.

    This sub-indicator examines the percentage of dwelling units and 
systems that a PHA inspects on an annual basis in order to determine 
short-term maintenance needs and long-term modernization needs. The PHA 
is required to conduct dwelling unit and systems inspections using the 
HUD Uniform Physical Condition Standards (UPCS) set forth in 24 CFR 
part 5, subpart G.
    (a) Adequacy of inspection program. It is implicit in this sub-
indicator that the PHA have an adequate inspection program in terms of 
tracking inspections, ensuring the thoroughness/quality of the PHA's 
inspections, and tracking needed repairs.
    (b) Units to be inspected. All occupied units and/or units 
available for occupancy are required to be inspected. This includes 
units used for non-dwelling purposes, those occupied by an employee, 
and those used for resident services.
    (c) Units exempted. Units in the following categories are exempted 
and not included in the calculation of the total number of units, and 
the number and percentage of units inspected for the assessed fiscal 
year.
    (1) Occupied units for which a PHA has documented two attempts to 
inspect the unit during the assessed fiscal year, but only if the PHA 
can document that it has initiated eviction proceedings, and is in the 
process of evicting the legal or illegal occupant(s) as provided under 
the lease to ensure that the unit can be subsequently inspected.
    (2) Units vacant during the assessed fiscal year for the following 
reasons:
    (i) Vacant units that are receiving section 9(d) Capital Funds; or
    (ii) Vacant units that are documented to be uninhabitable for 
reasons beyond a PHA's control due to:
    (A) High/unsafe levels of hazardous/toxic materials;
    (B) An order of the local health department or state agency or a 
directive of the Environmental Protection Agency;
    (C) Natural disasters; or
    (D) Units that are kept vacant because they are structurally 
unsound and documented action has been initiated to rehabilitate or 
demolish the units.
    (d) Systems exempted. Systems that are a part of individual 
dwelling units that are exempted, or a part of a building where all of 
the dwelling units in the building are exempted, are also exempted from 
the calculation of this sub-indicator.
    (e) Grades for annual inspection of dwelling units and systems.
    (1) Component 1. Annual inspection of dwelling units.
    (i) Grade A: When a PHA inspected 100 percent of its units during 
the assessed fiscal year and, if repairs were necessary for compliance 
with 24 CFR part 5, subpart G:
    (A) Completed the repairs during the inspection;
    (B) Issued work orders for the repairs; or
    (C) Referred similar work items to the current year's section 9(d) 
Capital Fund program, or to next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of a PHA's assessed fiscal year from the time the inspection was 
completed.
    (ii) Grade B: When a PHA inspected less than 100 percent but at 
least 98 percent of the units during the assessed fiscal year and, if 
repairs were necessary for compliance with 24 CFR part 5, subpart G:
    (A) Completed the repairs during the inspection;
    (B) Issued work orders for the repairs; or
    (C) Referred similar work items to the current year's section 9(d) 
Capital Fund program, or to next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of a PHA's assessed fiscal year from the time the inspection was 
completed.
    (iii) Grade C: When a PHA inspected less than 98 percent but at 
least 97 percent of its units during the assessed fiscal year and, if 
repairs were necessary for compliance with 24 CFR part 5, subpart G:
    (A) Completed the repairs during the inspection;
    (B) Issued work orders for the repairs; or
    (C) Referred similar work items to the current year's section 9(d) 
Capital Fund program, or to next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of a PHA's assessed fiscal year from the time the inspection was 
completed.
    (iv) Grade D: When a PHA inspected less than 97 percent but at 
least 96 percent of its units during the assessed fiscal year and, if 
repairs were necessary for compliance with 24 CFR part 5, subpart G:
    (A) Completed the repairs during the inspection;
    (B) Issued work orders for the repairs; or
    (C) Referred similar work items to the current year's section 9(d) 
Capital Fund program, or to next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of a PHA's assessed fiscal year from the time the inspection was 
completed.
    (v) Grade F: When a PHA has failed to:
    (A) Inspect at least 96 percent of its units during the assessed 
fiscal year for compliance with 24 CFR part 5, subpart G;
    (B) Correct deficiencies during the inspection or issue work orders 
for the repairs; or
    (C) Refer similar work items to the current year's section 9(d) 
Capital Fund program, or to next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of a PHA's assessed fiscal year from the time the inspection was 
completed.
    (2) Component 2. Annual inspection of systems (including 
common areas and non-dwelling space).
    (i) Grade A: When a PHA inspected all major systems during the 
assessed fiscal year at 100 percent of its buildings and sites, 
according to its maintenance plan. The inspection must include:
    (A) Performing the required maintenance on structures and systems 
in accordance with 24 CFR part 5, subpart G, and manufacturers' 
specifications;
    (B) Issuing work orders for maintenance/repairs; or
    (C) Including identified deficiencies in the current year's section 
9(d) Capital Fund program, or in next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of the PHA's assessed

[[Page 6283]]

fiscal year at the time the inspection was performed.
    (ii) Grade B: When a PHA inspected all major systems for less than 
100 percent but at least 95 percent of its buildings and sites during 
the assessed fiscal year, according to its maintenance plan. The 
inspection must include:
    (A) Performing the required maintenance on structures and systems 
in accordance with 24 CFR part 5, subpart G, and manufacturers' 
specifications;
    (B) Issuing work orders for maintenance/repairs; or
    (C) Including identified deficiencies in the current year's section 
9(d) Capital Fund program, or in next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of the PHA's assessed fiscal year at the time the inspection was 
performed.
    (iii) Grade C: When a PHA inspected all major systems for less than 
95 percent but at least 90 percent of its buildings and sites during 
the assessed fiscal year, according to its maintenance plan. The 
inspection must include:
    (A) Performing the required maintenance on structures and systems 
in accordance with 24 CFR part 5, subpart G, and manufacturers' 
specifications;
    (B) Issuing work orders for maintenance/repairs; or
    (C) Including identified deficiencies in the current year's section 
9(d) Capital Fund program, or in next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of the PHA's assessed fiscal year at the time the inspection was 
performed.
    (iv) Grade D: When a PHA inspected all major systems for less than 
90 percent but at least 85 percent of its buildings and sites during 
the assessed fiscal year, according to its maintenance plan. The 
inspection must include:
    (A) Performing the required maintenance on structures and systems 
in accordance with 24 CFR part 5, subpart G, and manufacturers' 
specifications;
    (B) Issuing work orders for maintenance/repairs; or
    (C) Including identified deficiencies in the current year's section 
9(d) Capital Fund program, or in next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of the PHA's assessed fiscal year at the time the inspection was 
performed.
    (v) Grade F: When a PHA failed to:
    (A) Inspect all major systems for at least 85 percent of its 
buildings and sites during the assessed fiscal year and perform the 
required maintenance on these systems in accordance with 24 CFR part 5, 
subpart G, and manufacturers' specifications;
    (B) Issue work orders for maintenance/repairs; or
    (C) Include identified deficiencies in the current year's section 
9(d) Capital Fund program, or in next year's section 9(d) Capital Fund 
program if there are fewer than three months remaining before the end 
of the PHA's assessed fiscal year at the time the inspection was 
performed.


Sec.  902.45  Management operations sub-indicator 5--security.

    This sub-indicator evaluates a PHA's performance in tracking all 
types of crime-related problems by category of crime and date, time and 
place of incident in its properties; reporting incidents of crime to 
local law enforcement agencies; adopting and implementing applicant 
screening and resident eviction policies and procedures, and other 
anticrime strategies; coordinating with local government officials and 
residents in the properties on the implementation of such strategies. 
There are three components.
    (a) Policies. The applicant screening and resident eviction 
policies and procedures adopted by the Board and implemented by the PHA 
should be consistent with section 6(j)(1)(I) of the 1937 Act (42 U.S.C. 
1437d(j)(1)(I)).
    (b) Grades for the components of resident and applicant 
information.
    (1) Component 1. Tracking and reporting crime-related 
problems.
    (i) Grade A: When a PHA's Board, by resolution, adopted policies 
and a PHA implemented procedures and can document that it:
    (A) Tracked all types of crime and crime-related problems by 
category, date, time, and place in at least 95 percent of its property 
during the assessed fiscal year, and the action taken, as appropriate;
    (B) Had a cooperative system for tracking and reporting incidents 
of crime during the assessed fiscal year to local police authorities to 
improve law enforcement and crime prevention; and
    (C) Coordinated with local government officials and its residents 
during the assessed fiscal year on the implementation of anticrime 
strategies.
    (ii) Grade B: When a PHA's Board, by resolution, adopted policies 
and a PHA implemented procedures and can document that it:
    (A) Tracked all types of crime and crime-related problems by 
category, date, time, and place in at least 85 percent of its property 
during the assessed fiscal year, and the action taken, as appropriate; 
and
    (B) Reported incidents of crime during the assessed fiscal year to 
local police authorities to improve law enforcement and crime 
prevention.
    (iii) Grade C: When a PHA's Board, by resolution, adopted policies 
and a PHA implemented procedures and can document that it:
    (A) Tracked all types of crime and crime-related problems by 
category, date, time, and place in at least 75 percent of its property 
during the assessed fiscal year, and the action taken, as appropriate; 
and
    (B) Reported incidents of crime during the assessed fiscal year to 
local police authorities to improve law enforcement and crime 
prevention.
    (iv) Grade D: When a PHA's Board, by resolution, adopted policies 
and a PHA implemented procedures and can document that it:
    (A) Tracked all types of crime and crime-related problems by 
category, date, time, and place in at least 65 percent of its property 
during the assessed fiscal year, and the action taken, as appropriate; 
and
    (B) Reported incidents of crime during the assessed fiscal year to 
local police authorities to improve law enforcement and crime 
prevention.
    (v) Grade F: When a PHA's Board, by resolution, did not adopt 
policies or a PHA did not implement procedures, did not track any 
crime, or cannot document that it:
    (A) Tracked all types of crime and crime-related problems by 
category, date, time, and place in at least 65 percent of its property 
during the assessed fiscal year, and the action taken, as appropriate; 
or
    (B) Reported incidents of crime during the assessed fiscal year to 
local police authorities to improve law enforcement and crime 
prevention.
    (2) Component 2. Screening of Applicants.
    (i) Grade A: When a PHA's Board, by resolution, adopted policies 
and a PHA implemented procedures and can document that it successfully 
screened out and denied admission to public housing applicants during 
the assessed fiscal year who:
    (A) Had a recent history of criminal activity involving crimes to 
persons or property and/or other criminal acts that would adversely 
affect the health, safety or welfare of other residents or PHA 
personnel;
    (B) Were evicted, because of drug-related criminal activity, from 
housing assisted under the Act, for a minimum of a three year period 
beginning on the date of such eviction, unless the

[[Page 6284]]

applicant successfully completed, since the eviction, a rehabilitation 
program approved by a PHA;
    (C) A PHA had reasonable cause to believe are illegally using a 
controlled substance; or
    (D) A PHA had reasonable cause to believe abuses alcohol in a way 
that causes behavior that may interfere with the health, safety, or 
right to peaceful enjoyment of the premises by other residents or PHA 
personnel.
    (ii) Grade F: When a PHA's Board has not adopted policies or has 
not implemented procedures that result in screening out and denying 
admission during the assessed fiscal year to a public housing applicant 
who meets the criteria as described in paragraph (b)(2)(i) of this 
section, or the screening procedures do not result in the denial of 
admission to a public housing applicant who meets the criteria as 
described in paragraph (b)(2)(i) of this section.
    (3) Component 3. Lease enforcement.
    (i) Grade A: When a PHA's Board, by resolution, adopted policies 
and a PHA implemented procedures and can document that it appropriately 
evicted during the assessed fiscal year any public housing resident 
who:
    (A) A PHA had reasonable cause to believe engages in any criminal 
activity that threatens the health, safety, or right to peaceful 
enjoyment of the premises by other residents or PHA personnel;
    (B) A PHA had reasonable cause to believe engages in any drug-
related criminal activity (as defined at section 3(b) of the Act (42 
U.S.C. 1437a(b)(9)) on or off a PHA's property; or
    (C) A PHA had reasonable cause to believe abuses alcohol in such a 
way that causes behavior that may interfere with the health, safety, or 
right to peaceful enjoyment of the premises by other residents or PHA 
personnel.
    (ii) Grade F: When a PHA's Board has not adopted policies or has 
not implemented procedures that document results in the eviction during 
the assessed fiscal year of any public housing resident who meets the 
criteria as described in paragraph (b)(3)(i) of this section, or the 
eviction procedures do not result in the eviction of public housing 
residents who meet the criteria as described in paragraph (b)(3)(i) of 
this section.


Sec.  902.46  Management operations sub-indicator 6--self-
sufficiency.

    This sub-indicator measures a PHA's efforts to coordinate, promote 
or provide effective programs and activities to promote the self-
sufficiency of residents and resident participation in the 
administration of public housing.
    (a) General applicability. A PHA that does not have a mandatory FSS 
program shall not be assessed under the applicable component of this 
sub-indicator. The weight for that component shall be redistributed 
among the remaining components of this sub-indicator.
    (b) Grades for self-sufficiency.
    (1) Component 1. Economic self-sufficiency. A PHA shall 
use its best efforts to enter into cooperative agreements with state, 
local and other agencies providing welfare or public assistance that 
may provide information to facilitate a PHA in targeting assistance and 
services supporting economic self-sufficiency.
    (i) Grade A: When a PHA entered into an agreement with a public 
assistance provider and can document that information is being provided 
to facilitate assistance to the PHA in targeting assistance and 
services supporting economic self-sufficiency.
    (ii) Grade C: When a PHA entered into an agreement with a public 
assistance provider, but cannot document that information is being 
provided to facilitate assistance to the PHA in targeting assistance 
and services supporting economic self-sufficiency.
    (iii) Grade F: When a PHA has not entered into an agreement with a 
public assistance provider and has not documented that information is 
being provided to facilitate assistance to the PHA in targeting 
assistance and services supporting economic self-sufficiency.
    (2) Component 2. FSS. After assessing the needs of 
families and the training and employment resources in the community, a 
PHA and other local partners, such as public assistance providers, work 
together to develop a comprehensive program that can provide each 
family with appropriate education, job training and other services to 
enable them to obtain employment.
    (i) Grade A: When a PHA documents that it has a mandatory FSS 
program and documents that it:
    (A) Met or exceeded at least 80 percent of the total proposed 
participation; and
    (B) At least 30 percent of the FSS families have escrow accounts 
greater than zero.
    (ii) Grade C: When a PHA documents that it has a mandatory FSS 
program and documents that it:
    (A) Met at least 60 percent of the total proposed participation; 
and
    (B) At least 30 percent of the FSS families have escrow accounts 
greater than zero.
    (iii) Grade F: When a PHA documents that it has a mandatory FSS 
program and cannot document its performance or documents that it:
    (A) Met less than 60 percent of the total proposed participation; 
or
    (B) Less than 30 percent of the FSS families have escrow accounts 
greater than zero.
    (3) Component 3. Resident job training and employment. A 
PHA has executed a Memorandum of Understanding for partnering locally 
with a social service, labor, Temporary Assistance for Needy Families 
(TANF) or similar type agency or non-profit to supply employment and/or 
job training and placement for residents. A PHA has hired residents 
under in-house apprenticeship programs or through force account 
employment to perform maintenance and repairs, or Section 3 compliance 
requirements incorporated into agency procurement and contracting 
solicitations and awards. A PHA has provided space and/or 
transportation for residents to access literacy, job training, and 
supportive services in connection with residents obtaining and 
maintaining employment.
    (i) Grade A: When a PHA executed a Memorandum of Understanding for 
partnering locally with a social service, labor, TANF, or similar type 
agency or non-profit to supply employment and/or job training and 
placement for residents and can document that it has hired residents 
under in-house apprenticeship programs or through force account 
employment to perform maintenance and repairs, or under Section 3 
compliance requirements. The PHA documents that it has incorporated 
Section 3 requirements in the agency's procurements and contracting 
solicitation and awards and provides space and/or transportation for 
residents to access literacy, job training, and supportive services in 
connection with residents obtaining and maintaining employment.
    (ii) Grade C: When a PHA executed a Memorandum of Understanding for 
partnering locally with a social service, labor, TANF, or similar type 
agency or non-profit to supply employment and/or job training and 
placement for residents, but cannot document that it has hired 
residents under in-house apprenticeship programs, or through force 
account employment to perform maintenance and repairs and Section 3 
compliance requirements. The PHA cannot document that it has 
incorporated Section 3 requirements in the agency's procurements and 
contracting solicitation and awards and does not provide space and/or 
transportation for residents to access literacy, job training, and 
supportive services in connection

[[Page 6285]]

with residents obtaining and maintaining employment.
    (iii) Grade F: When a PHA has not executed a Memorandum of 
Understanding for partnering locally with a social service, labor, 
TANF, or similar type agency or non-profit to supply employment and/or 
job training and placement for residents, and has not hired residents 
under in-house apprenticeship programs, through force account 
employment to perform maintenance and repairs and or Section 3 
compliance requirements. The PHA has not incorporated Section 3 
requirements in the agency's procurements and contracting solicitation 
and awards and does not provide space and/or transportation for 
residents to access literacy, job training, and supportive services in 
connection with residents obtaining and maintaining employment.
    (4) Component 4. Resident participation in management, 
business property, and public housing administration. A PHA has 
executed a Memorandum of Understanding that provides for at least 
quarterly meetings with a Resident Advisory Board and/or duly elected 
resident organizations to assure quality service in the delivery of 
property management and maintenance services. For public housing 
administration, a PHA has entered into written agreements with RMCs 
and/or resident-owned businesses to provide full or partial property 
management and maintenance services, or supportive services to 
residents.
    (i) Grade A: When a PHA executed a Memorandum of Understanding with 
a Resident Advisory Board and/or duly elected resident organizations 
and documents that quarterly meetings were held to assure quality 
service in the deliverance of property management and maintenance 
services. The PHA entered into written agreements with RMCs and/or 
resident-owned businesses and can document that it provided full or 
partial property management and maintenance services.
    (ii) Grade C: When a PHA executed a Memorandum of Understanding 
with a Resident Advisory Board and/or duly elected resident 
organizations, but cannot document that quarterly meetings were held to 
assure quality service in the deliverance of property management and 
maintenance services. The PHA has entered into written agreements with 
RMCs and/or resident-owned businesses, but cannot document that it 
provided full or partial property management and maintenance services.
    (iii) Grade F: When a PHA has not executed a Memorandum of 
Understanding with a Resident Advisory Board and/or duly elected 
resident organizations, and cannot document that quarterly meetings 
were held to assure quality service in the deliverance of property 
management and maintenance services. The PHA has not entered into 
written agreements with RMCs and/or resident-owned businesses, and 
cannot document that it provided full or partial property management 
and maintenance services.


Sec.  902.47  Management operations sub-indicator  7--income 
verification.

    This sub-indicator evaluates a PHA's performance in and ability to 
properly verify applicant/resident income.
    (a) Grade A: When a PHA, at the time of admission and annual 
reexamination, correctly verifies and determines adjusted annual income 
for 100 percent of assisted families.
    (b) Grade F: When a PHA, at the time of admission and annual 
reexamination, does not correctly verify and determine adjusted annual 
income for 100 percent of assisted families.


Sec.  902.48  Management operations sub-indicator 8--rent 
calculation.

    This sub-indicator evaluates a PHAs performance in and ability to 
correctly calculate resident rents.
    (a) Grade A: When a PHA correctly calculates the rent of 100 
percent of its residents by applying the appropriate deductions, 
exclusions and allowances; and when the family is responsible for 
utilities under the lease, the PHA uses the appropriate utility 
allowance for the unit leased in determining gross rent.
    (b) Grade F: When a PHA does not correctly calculate the rent of 
100 percent of its residents by applying the appropriate deductions, 
exclusions and allowances; or when the family is responsible for 
utilities under the lease, the PHA did not use the appropriate utility 
allowance for the unit leased in determining gross rent.


Sec.  902.49  Threshold.

    When a PHA receives a grade of F under this indicator, the PHA 
shall be designated a Grade F PHA. When a PHA receives a grade of D 
under this indicator, the PHA shall be designated a Grade D PHA.

Subpart E--PHAS Indicator 4: Resident Service and 
Satisfaction


Sec.  902.50  Resident service and satisfaction assessment.

    (a) Method of assessment, generally. The resident service and 
satisfaction assessment, which measures the level of resident 
satisfaction with living conditions, is performed through a survey. A 
third party organization administers the survey to the PHA residents.
    (b) Survey process. The PHA shall manage the survey process in 
accordance with a methodology prescribed by HUD. In addition, PHAs must 
address any issues identified in the survey. As part of the survey 
process, the PHA is responsible for:
    (1) Updating the unit addresses;
    (2) Certifying to the update of the unit addresses; and
    (3) Completing implementation plan activities and certifying to 
their completion.
    (c) HUD review. The completion of the required actions and the 
corresponding certifications are subject to HUD on-site review at any 
time. A PHA that is unable to provide supporting documentation to HUD 
will receive a zero and a grade of F for this indicator and its final 
overall PHAS grade will be lowered.
    (d) Frequency of assessment. In accordance with Sec.  902.13(a), 
HUD will conduct a resident service and satisfaction survey for an 
assessed fiscal year only. For fiscal years when a PHA is not assessed 
under this part, the PHA may undertake a resident service and 
satisfaction survey on its own.


Sec.  902.51  Certifications and updating of unit address information.

    (a) Electronic unit address update and verification. At the 
beginning of the annual survey process the PHA is required to ensure 
that its public housing unit addresses are accurate.
    (1) All PHAs are required to electronically update unit address 
information in the Public and Indian Housing Information Center (PIC) 
database. All PHAs are required to make any additions, deletions and 
corrections to their respective unit addresses in PIC.
    (2) After updating the unit address information electronically, the 
PHA will certify electronically in the resident assessment sub-system 
(RASS) database that the list of unit addresses for their property 
residents is correct.
    (3) A PHA is required to both update and certify its unit address 
information to ensure that HUD has complete and accurate information, 
and to ensure that the surveys reach the residents. If a random sample 
of residents cannot be selected to participate in the survey because 
the unit addresses are incorrect or obsolete, HUD is not able to 
conduct the survey at that PHA. In that case, the PHA shall receive a 
zero and a grade of F for the Resident Service and Satisfaction 
Indicator.
    (b) Implementation plan certification. All PHAs are required to 
certify to their implementation plans electronically in

[[Page 6286]]

the RASS database in accordance with HUD guidance.


Sec.  902.52  Resident survey sampling.

    A random sample of units shall be chosen to receive the Customer 
Service and Satisfaction Survey at each PHA. The units shall be 
randomly selected based on the total number of occupied and vacant 
units at the PHA. The unit sampling for each PHA is based on the unit 
representation of each property in relation to the size of the entire 
PHA.


Sec.  902.53  Third party administrator.

    The third party administrator designated by HUD is responsible for 
performing the following functions as part of the survey process.
    (a) Distributing the survey to a randomly selected sample of units 
at each PHA;
    (b) Receiving the completed surveys;
    (c) Collecting, scanning, and aggregating results of the survey;
    (d) Transmitting the survey results to HUD for analysis and 
grading; and
    (e) Maintaining the individual surveys and ensuring that the 
responses to the surveys are kept confidential.


Sec.  902.54  Resident service and satisfaction grading and survey 
contents.

    (a) Grading. A PHA shall be graded A, B, C, D or F on the Resident 
Service and Satisfaction Indicator survey results. The overall resident 
service and satisfaction grade for a PHA is based on the numeric value 
for each property within the PHA. It is a weighted average of the 
numeric value of each property-level grade. The final grades are based 
on the percentage of points out of the total number of possible points 
that the PHA receives on the survey, converted to a 0.0 to 4.0 scale. 
The methods for obtaining the weighted average and the final resident 
service and satisfaction grades are more fully explained in the 
resident service and satisfaction grading process notice.
    (b) Survey contents. The survey content focuses on resident 
evaluation of the overall living conditions. Residents are asked 
questions about:
    (1) Maintenance, repair, and services (e.g., work order response);
    (2) Communications (e.g., perceived effectiveness);
    (3) Safety (e.g., perception of personal security);
    (4) Property appearance; and
    (5) Self-Sufficiency.


Sec.  902.55  Threshold.

    A PHA shall receive a zero and a grade of F under this indicator if 
the survey process is not managed as directed by HUD, it is determined 
that the survey results have been altered, or it is determined that the 
surveys were completed by someone other than the designated residents. 
When a PHA receives a grade of F under this indicator, the PHA shall be 
designated a Grade F PHA. When a PHA receives a grade of D under this 
indicator, the PHA shall be designated a Grade D PHA.

Subpart F--PHAS Submission Requests and Grade Adjustments


Sec.  902.60  Requests for manual and late submissions.

    (a) Request to manually submit PHAS Indicators #2 and #3. If the 
electronic submission requirement poses an administrative or cost 
burden, a PHA may request approval to submit the unaudited year-end 
financial information and management operations certification manually. 
The request must include the reasons why the PHA is unable to submit 
the data electronically. The PIH-REAC must receive the request for 
manual submission 60 days prior to the submission due date for each 
PHAS indicator. A PHA shall forward its request for manual submission 
in writing to the Director of PIH-REAC, 1280 Maryland Avenue, SW., 
Suite 800, Washington, DC 20024-2135 or submit its request to 
[email protected] by e-mail. HUD shall respond to the PHA's request and 
forward its determination in writing or by e-mail to the PHA. Approvals 
are for the PHA's assessed fiscal year only.
    (b) Request to manually submit PHAS Indicator #4. If the electronic 
updating and certification requirements pose an administrative or cost 
burden, a PHA may request approval to manually update resident unit 
addresses, certify to updated addresses and certify to the survey 
implementation plan. The request must include the reason why the PHA is 
unable to update and certify electronically. The PIH-REAC must receive 
the request 30 days prior to the due dates for the resident unit 
address update and certification and for the certification to the 
survey implementation plan. A PHA shall forward its request in writing 
to the Director of PIH-REAC, 1280 Maryland Avenue, SW., Washington, DC 
20024-2135 or submit its request to [email protected] by e-mail. HUD shall 
respond to the PHA's request and forward its determination in writing 
to the PHA. Approvals shall be only for the PHA's current survey cycle.
    (c) Request for extension of time to make submissions. In the event 
of extenuating circumstances, a PHA may request an extension of time to 
submit its unaudited financial information, management operations 
certification, and resident service and satisfaction certifications. To 
receive an extension, a PHA must ensure that the PIH-REAC receives the 
PHA's extension request (electronic or written) 15 days before the 
submission due date. The PHA's extension request (electronic or 
written) must include a justification as to why the PHA cannot submit 
the information by the submission due date. A PHA shall submit its 
request for an extension of time to the Director of PIH-REAC, 1280 
Maryland Avenue, SW., Suite 800, Washington, DC 20024-2135, or submit 
its request to [email protected] by email. HUD shall forward its 
determination (electronic or written) to the PHA.
    (d) Request for extension of time to submit audited financial 
information. In accordance with OMB Circular A-133, HUD, for good 
cause, may grant PHAs an extension of time to submit audited financial 
information. HUD shall consider PHA requests for extensions of the 
report submission due date (established by OMB as no later than nine 
months after the end of the fiscal year). The PHA's extension request 
(electronic or written) must include a justification as to why the PHA 
cannot submit the information by the submission due date. The OMB 
requires that the request be submitted prior to the submission due 
date. A PHA shall submit its request for an extension of time to the 
Director of PIH-REAC, 1280 Maryland Avenue, SW., Suite 800, Washington, 
DC 20024-2135, or submit its request to [email protected] by email. HUD 
shall forward its determination (electronic or written) to the PHA.


Sec.  902.61  Failure to submit data.

    (a) Failure to submit data by due date. (1) HUD shall impose letter 
grade deductions if a PHA, without a finding of good cause by HUD, 
submits its year-end unaudited financial information or management 
operations certification, required by this part, past the due dates. 
The letter grade deductions will be imposed on each indicator beginning 
on the eighth day after the submission due date.
    (2) A PHA shall receive a presumption rating of zero and a grade of 
F for each PHAS indicator for which the certification or year-end 
unaudited financial information is not received within 49 days after 
the due date.

[[Page 6287]]



(i) Table 1.--Late Submission for Either Unaudited Financial Information
                 or Management Operations Certification
------------------------------------------------------------------------
 If a PHA submits either its unaudited
  financial information or management               Then * * *
     operations certification * * *
------------------------------------------------------------------------
(A) more than 7 days, but no more than   the PHA's grade will be lowered
 21 days after the submission due date.   one letter grade for the
                                          indicator submitted late.
(B) more than 21 days, but no more than  the PHA's grade will be lowered
 35 days, after the submission due date.  two letter grades for the
                                          indicator submitted late.
(C) more than 35 days, but no more than  the PHA's grade will be lowered
 49 days, after the submission due date.  three letter grades for the
                                          indicator submitted late.
(D) more than 49 days after the          the PHA will receive a late
 submission due date.                     presumptive rating of zero and
                                          its grade for the indicator
                                          submitted late will be an F.
------------------------------------------------------------------------


 (ii) Table 2.--Late Submission for Both Unaudited Financial Information
                 and Management Operations Certification
------------------------------------------------------------------------
  If a PHA submits both its unaudited
  financial information and management              Then * * *
     operations certification * * *
------------------------------------------------------------------------
(A) more than 7 days, but no more than   one letter grade will be
 21 days after the submission due date.   deducted from each indicator
                                          submitted during this time
                                          period.
(B) more than 21 days, but no more than  two letter grades will be
 35 days after the submission due date.   deducted from each indicator
                                          submitted during this time
                                          period.
(C) more than 35 days, but no more than  three letter grades will be
 49 days, after the submission due date.  deducted from each indicator
                                          submitted during this time
                                          period.
(D) more than 49 days after the          the PHA will receive a late
 submission due date.                     presumptive rating of zero and
                                          its grade for both indicators
                                          will be an F.
------------------------------------------------------------------------

    (3) The PHA shall receive a presumptive rating of zero and a grade 
of F for the Financial Condition Indicator, if a PHA, without a finding 
of good cause, submits its audited financial information after the due 
date.

     (i) Table 3.--Late Submission for Audited Financial Information
------------------------------------------------------------------------
 If a PHA submits its audited financial
           information * * *                        Then * * *
------------------------------------------------------------------------
(A) more than 9 months after the PHA's   the PHA will receive a late
 fiscal year end.                         presumptive rating of zero and
                                          its financial condition
                                          indicator grade will be an F.
(B) [Reserved].........................
------------------------------------------------------------------------

    (b) Presumptive rating of zero and grade of F. If the PHA receives 
a presumptive rating of zero and grade of F for any PHAS indicator due 
to failure to submit a certification, year-end financial information, 
or audited financial information by the due date, including any 
applicable extension of the due date, the PHA shall be designated a 
Grade F PHA or Capital Fund Grade F PHA pursuant to Sec.  902.10.
    (c) Rejected submissions. When HUD rejects a PHA's year-end 
unaudited financial information or management operations certifications 
after the due date, a PHA shall have 15 days from the date of the 
rejection to resubmit the information without a penalty being applied.


Sec.  902.63  PHAS grade adjustments.

    (a) Issuance of grade by HUD. HUD will issue an overall PHAS grade 
for each PHA after the later of one month after the submission due date 
for financial information and the other required certifications, or one 
month after submission by the PHA of its financial information and the 
other required information certifications. The overall PHAS grade 
becomes the PHA's final grade upon issuance by HUD.
    (b) Adjustments to the PHAS grade. Adjustments may be made to a 
PHA's final overall PHAS grade as a result of:
    (1) The IPA or CPA audit, as provided in subpart C;
    (2) Property reinspections;
    (3) The appeal process provided in Sec.  902.69;
    (4) Determinations as a result of HUD's Office of Inspector General 
(OIG) investigation and/or audit;
    (5) Investigations by HUD's Office of Fair Housing and Equal 
Opportunity;
    (6) A HUD conducted compliance review or quality assurance review;
    (7) A HUD conducted certification review;
    (8) A Field Office on-site review; and/or
    (9) An investigation by any appropriate legal authority.
    (c) Record retention and verification of information submitted. (1) 
A PHA shall maintain documentation for three years verifying 
information on all indicators, sub-indicators, and components for HUD 
on-site review.
    (2) A PHA's certifications, year-end financial information, and all 
supporting documentation are subject to verification by HUD at any 
time, including review by an independent auditor as authorized by 
section 6(j)(6) of the Act (42 U.S.C. 1437d(j)(6)). Appropriate 
sanctions for false certification shall be imposed, including civil 
penalties, limited denial of participation, suspension, or debarment of 
the signatories, the loss of Grade A PHA designation pursuant to Sec.  
902.67, and a lower grade under the PHAS indicators that shall result 
in a lower overall PHAS grade.
    (3) A PHA that cannot provide supporting documentation to HUD, or 
to the PHA's IPA or CPA for the assessment under any indicator(s), sub-
indicator(s), and/or component(s) shall receive a zero and a grade of F 
for that indicator(s), sub-indicator(s), and/or component(s), and its 
overall PHAS grade shall be lowered.

[[Page 6288]]

    (d) Review of a PHA's audited financial information. As part of 
HUD's ongoing quality assurance process, HUD may conduct a quality 
assurance review of a PHA's IPA or CPA statement and work papers. If a 
PHA's audit is determined to be deficient as a result of a quality 
assurance review, HUD may, at its discretion, select the audit firm 
that will perform a new audit of the PHA and may serve as the audit 
committee for the audit in question. This quality assurance review is 
important to determine the accuracy of the grading under Financial 
Condition Indicator 2.


Sec.  902.67  Withholding, denying, and rescinding grades.

    (a) Withholding, denying, and rescinding grade/designation. (1) In 
exceptional circumstances, HUD may conduct any review as it may 
determine necessary, and may deny or rescind incentives for Grade A, B, 
C, or D PHA designations even though a PHA has satisfied all of the 
PHAS indicators for Grade A, B, C, or D PHA designation. HUD may do so 
only in the case of a PHA that:
    (i) Is operating under a special agreement with HUD;
    (ii) Is involved in litigation that bears directly upon the 
physical, financial, or management performance of a PHA;
    (iii) Is operating under a court order;
    (iv) Demonstrates substantial evidence of fraud or misconduct, 
including evidence that the PHA's certifications submitted under this 
part, are not supported by the facts as evidenced by sources such as a 
HUD monitoring and/or compliance review, routine reports, a HUD (OIG) 
investigation and/or audit, an IPA's or CPA's audit, or an 
investigation by any appropriate legal authority; or
    (v) Demonstrates substantial noncompliance in one or more areas of 
a PHA's required compliance with applicable laws and regulations, 
including areas not assessed under the PHAS. Areas of substantial 
noncompliance include, but are not limited to, noncompliance with civil 
rights, procurements, nondiscrimination and fair housing laws and 
regulations, or the ACC. Substantial noncompliance casts doubt on the 
capacity of a PHA to preserve and protect its public housing properties 
and operate them consistent with Federal laws and regulations.
    (2) If a Grade A, B, C, or D PHA designation is denied or 
rescinded, the PHA shall be a Grade F PHA.
    (b) Effect of denial or rescission. The denial or rescission of a 
designation of a Grade A, B, C, or D PHA will result in an overall 
final PHAS grade of zero.
    (c) Procedures for request for reinstatement of grade/designation. 
A PHA that disagrees with the denial or rescission of its grade/
designation may request reinstatement of the grade/designation. The 
request, which must be in writing and include reasons for the 
reinstatement, must be directed to the Assistant Secretary. Requests 
must be sent to: Assistant Secretary for Public and Indian Housing, 
Department of Housing and Urban Development, 451 Seventh Street SW., 
Room 4100, Washington, DC 20410.


Sec.  902.68  Technical review of results of PHAS Indicators 1 
or 4.

    (a) Request for technical reviews. A PHA may request a technical 
review of physical inspection results and resident survey results.
    (1) For all technical reviews, the burden of proof is on the PHA to 
show that an error occurred.
    (2) A PHA's request for technical review must be submitted in 
writing to the Director of PIH-REAC, 1280 Maryland Avenue, SW., Suite 
800, Washington, DC 20024-2135. PIH-REAC must receive the written 
request no later than 15 days following the issuance of the physical 
inspection results or the resident survey results to the PHA. The 
request must include the PHA's reasonable evidence that an error 
occurred.
    (b) Technical review of physical inspection results. (1) If after 
review of the results of the physical inspection and grade for a 
property, the PHA believes that an objectively verifiable and material 
error (or errors) occurred in the inspection of that property, the PHA 
may request a technical review of the inspection results for that 
property.
    (2) The PHA's request must include the PHA's evidence that an 
objectively verifiable and material error occurred. A PHA must submit 
documentation such as photographic evidence, written material from an 
objective source such as a local fire marshal or building code 
official, or other similar evidence. The evidence must have a factual 
basis other than a disagreement with the inspector's observations or 
the inspector's finding regarding the severity of the deficiency.
    (3) A technical review of a property's physical inspection will not 
be conducted based on conditions, other than EHS deficiencies, that 
were corrected subsequent to the inspection, or based on a challenge to 
the grading class.
    (4) After receipt of a PHA's request for technical review of a 
property's inspection results, PIH-REAC shall review the PHA's file and 
any objectively verifiable evidence submitted by the PHA. If PIH-REAC's 
review determines that an objectively verifiable and material error (or 
errors) has been documented, then PIH-REAC may take one or a 
combination of the following actions:
    (i) Undertake a new inspection;
    (ii) Correct the physical inspection report;
    (iii) Issue a corrected physical condition grade; or
    (iv) Issue a corrected PHAS grade.
    (5) In determining whether a new inspection of the property is 
warranted, PIH-REAC shall review the PHA's file and evidence submitted. 
PIH-REAC shall then determine whether the evidence supports that there 
may have been a significant contractor error in the inspection which, 
if a new inspection were conducted, would result in a significant 
change from the property's original physical condition grade, overall 
PHAS grade, and corresponding PHAS designation (i.e., Grade A PHA, 
Grade B PHA, Grade C PHA, and Grade D PHA). If the new inspection 
results in a significant change in the PHA's original physical 
condition grade, PHAS grade and corresponding designation, PIH-REAC 
shall issue a new PHAS grade and corresponding designation to the PHA.
    (6) Material errors are the only grounds for technical review of 
physical inspection results. There are three types of material errors.
    (i) Building data error. A building data error occurs if the 
inspection includes the wrong building, a building that was not owned 
by the PHA, or a common area or site areas that are not a part of the 
property. Incorrect building data that does not affect the grade, such 
as the address, the building name, the year built, etc., are not 
considered material. However, HUD requests notification of these errors 
so they may be corrected in the database.
    (ii) Unit count error. A unit count error occurs if the total 
number of public housing units used in the grading is incorrect. 
Because the grading uses total public housing units, PIH-REAC shall 
review instances when the participant can provide evidence that the 
total units used is incorrect.
    (iii) Non-existent deficiency error. A non-existent deficiency 
error occurs if the inspection cites a deficiency that does not exist.
    (c) Technical review of resident survey results. If after review of 
the results of the resident service and satisfaction survey, the PHA 
believes that the contracted third party administrator can be shown to 
be in error, the PHA may request a technical review of a PHA's resident 
survey results.

[[Page 6289]]

    (1) The PHA's request must include objectively verifiable evidence 
that a technical error occurred. Examples of technical errors include, 
but are not limited to, incorrect material being mailed to residents, 
or incorrect PHA unit addresses due to the third party administrator's 
error, such as unit numbers being omitted from the addresses. A PHA 
that does not update its unit address list pursuant to Sec.  902.51 may 
not request a technical review based on incorrect addresses.
    (2) After receipt of a PHA's request for technical review of 
resident survey results, PIH-REAC shall review the PHA's file and any 
evidence submitted by the PHA. If PIH-REAC's review determines that an 
error has been documented, then PIH-REAC may take one or a combination 
of the following actions:
    (i) Undertake a new survey;
    (ii) Correct the resident survey results report;
    (iii) Issue a corrected resident services and satisfaction grade; 
or
    (iv) Issue a corrected PHAS grade.
    (d) Review of technical review decisions. The Assistant Secretary 
will review all technical reviews that are denied by PIH-REAC.


Sec.  902.69  PHA right of petition and appeal.

    (a) Appeals and petitions. A PHA may:
    (1) Appeal its Grade F PHA designation (including Grade F PHA and 
Capital Fund Grade F PHA as provided in Sec.  902.10(c));
    (2) Appeal its final overall PHAS grade;
    (3) Petition for removal of Grade F PHA designation; and
    (4) Appeal any refusal of a petition to remove its Grade F PHA 
designation.
    (b) Appeal of final overall PHAS grade. (1) If a PHA believes that 
an objectively verifiable and material error (or errors) exists in any 
of its final PHAS indicator grades, which, if corrected, will result in 
a significant change in the PHA's final overall PHAS grade and its 
designation, the PHA may appeal its final overall PHAS grade in 
accordance with the procedures of this section. A significant change in 
a final overall PHAS grade is a change that would cause the PHA's final 
overall PHAS grade to increase, resulting in a higher PHAS designation 
for the PHA (i.e., from Grade F PHA to Grade D PHA, Grade D PHA to 
Grade C PHA, Grade C PHA to Grade B PHA, Grade B PHA to Grade A PHA).
    (2) A PHA that is under the jurisdiction of the appropriate HUD 
office having jurisdiction over Grade F PHAs may appeal its overall 
final PHAS grade after one year even if granting the appeal does not 
change its grade of F. This right to appeal provides the PHA with the 
opportunity to meet the requirements to substantially improve its 
performance under PHAS pursuant to Sec.  902.75(f).
    (c) Appeal and petition procedures. (1) To appeal its Grade F PHA 
designation or its final overall PHAS grade, a PHA shall submit a 
request in writing to the Director of PIH-REAC at 1280 Maryland Avenue, 
SW., Suite 800, Washington, DC 20024. PIH-REAC must receive the written 
request no later than 30 days following the issuance of the designation 
and the final overall PHAS grade to the PHA.
    (2) To petition removal of Grade F PHA designation, a PHA shall 
submit its request in writing to the Director of PIH-REAC at 1280 
Maryland Avenue, SW., Suite 800, Washington, DC 20024.
    (3) An appeal of a Grade F designation or petition for removal of 
Grade F designation must include the PHA's supporting documentation and 
reasons for the appeal. An appeal of a final overall PHAS grade must 
include the PHA's reasonable evidence that an objectively verifiable 
and material error occurred. Any appeal or petition submitted to PIH-
REAC without appropriate documentation shall not be considered and 
shall be returned to the PHA.
    (d) Consideration of petitions and appeals. (1) Consideration of 
appeal of final overall PHAS grade. After receipt of an appeal of a 
final overall PHAS grade from a PHA, PIH-REAC shall review the PHA's 
file and the evidence submitted by the PHA supporting that an 
objectively verifiable and material error occurred. If PIH-REAC 
determines that the PHA has documented an objectively verifiable and 
material error, PIH-REAC shall convene a Board of Review (the Board), 
in accordance with the procedures of this section, to evaluate the 
appeal and its merits. If the Board determines that an objectively 
verifiable and material error existed for any of the PHAS indicators 
based on the evidence, the Board may determine either that a 
reassessment of the PHA is warranted or that the PHA's PHAS indicator 
grade(s) and final overall PHAS grade are changed, resulting in a 
change of designation. If the Board determines that a reassessment of 
the PHA is warranted, PIH-REAC shall schedule a reinspection or 
undertake a new assessment of the financial condition, management 
operations, or resident service and satisfaction, or any combination 
thereof. If the Board determines that a grade should be changed, that 
change shall be made by PIH-REAC.
    (2) Consideration of appeal of Grade F PHA designation or petition 
to remove Grade F PHA designation. After receipt of an appeal of a 
Grade F PHA designation or petition to remove a Grade F PHA 
designation, PIH-REAC shall convene a Board to evaluate the appeal or 
petition and its merits. The Board may determine that a reassessment is 
necessary or may determine that other actions such as changing the 
PHA's designation, or removing the PHA's Grade F PHA designation are 
appropriate. If the Board determines that a reassessment is warranted, 
PIH-REAC shall schedule a reinspection or undertake a new assessment of 
the financial condition, management operations or resident service and 
satisfaction, or any combination thereof. If the Board determines that 
the designation should be changed, that change shall be made by PIH-
REAC.
    (3) Board Membership. The Board membership shall be comprised of a 
representative from PIH-REAC, from the Office of Public and Indian 
Housing, and from such other office or other representatives as the 
Secretary may designate.
    (e) Appeal and petition decisions. HUD shall make final decisions 
of appeals and petitions under this section, within 30 days of receipt 
of the appeal or petition, and may extend this period for an additional 
30 days if necessary. A PHA's failure to submit supporting 
documentation with its request for appeal or petition, or within any 
additional period granted by HUD is grounds for denial of the appeal or 
petition. The Assistant Secretary shall report all final appeal 
decisions to PHAs.

Subpart G--PHAS Incentives and Remedies


Sec.  902.71  Incentives for Grade A PHAs.

    (a) Incentives for Grade A PHAs. A PHA that is a Grade A PHA shall 
be eligible for the following incentives, and any other incentives that 
HUD may determine appropriate and permissible under program statutes or 
regulations.
    (1) Relief from specific HUD requirements. (i) A Grade A PHA shall 
be relieved of specific HUD requirements (for example, fewer reviews 
and less monitoring), effective upon notification of Grade A PHA 
designation.
    (ii) As provided in Sec. Sec.  902.13 and 902.30, a PHA that is a 
Grade A PHA shall be next assessed under PHAS in three years. 
Notwithstanding the PHA's

[[Page 6290]]

PHAS assessment schedule, a Grade A PHA is required to submit annual 
unaudited and audited financial information. However, HUD shall not 
issue a grade for the unaudited and audited financial information in 
the years that a PHA is not being assessed under PHAS.
    (2) Public recognition. Grade A PHAs will receive a Certificate of 
Commendation from HUD. These PHAs also will receive special public 
recognition from the Hub Office/Program Centers.
    (3) Bonus points in funding competitions. A Grade A PHA shall be 
eligible for bonus points in HUD's funding competitions, and formula-
based programs when bonus points are not restricted by statute or 
regulation governing the funding program. Eligibility for Grade A PHAs 
to receive these bonus points will be stated in HUD's notices of 
funding availability or other funding documents.
    (b) Compliance with applicable Federal laws and regulations. Relief 
from any standard procedural requirement provided under this section 
does not relieve a PHA from the requirements of the provisions of other 
federal and state laws and regulations or other HUD handbook 
requirements. For example, although a Grade A PHA or a Grade B, C or D 
PHA may be relieved of requirements for prior HUD approval for certain 
types of contracts for services, the PHA must still comply with all 
other Federal and State requirements that remain in effect, such as 
those for competitive bidding or competitive negotiation (see 24 CFR 
85.36).
    (c) Audits and reviews not relieved by designation. A Grade A PHA 
or a Grade B, C or D PHA remains subject to:
    (1) Regular IPA or CPA audits.
    (2) OIG audits or investigations, which shall continue to be 
conducted as circumstances may warrant.


Sec.  902.73  Referral of Grade B, C, and D PHAs.

    (a) General. (1) Referral. Grade B, C, and D PHAs shall be referred 
to the Hub Office/Program Center for appropriate action.
    (2) Improvement Plan. (i) A PHA that is designated a Grade D PHA 
shall be required to submit an Improvement Plan to address deficiencies 
in the PHA's performance.
    (ii) A PHA that is designated a Grade B or C PHA may be required, 
at the discretion of the appropriate area Hub Office/Program Center, to 
submit an Improvement Plan to address specific deficiencies.
    (b) Submission of an Improvement Plan. A PHA is required to submit 
its Improvement Plan to the Hub Office/Program Center for approval 
within 30 days after the PHA's final overall PHAS grade is issued. All 
Improvement Plans must meet the requirements of paragraphs (d), (e) and 
(f) of this section.
    (c) Correction of deficiencies. (1) Time period for correction. 
After a PHA receives its overall PHAS grade and designation of Grade B, 
C, or D PHA, the PHA must correct any deficiency indicated in the 
assessment within 90 days, or, if an Improvement Plan is required, 
within such period as provided in the Improvement Plan.
    (2) Notification and report to Hub Office/Program Center. A PHA 
shall notify the Hub Office/Program Center of its action to correct 
each deficiency.
    (d) Improvement Plan. An Improvement Plan shall:
    (1) List each PHAS indicator, sub-indicator and/or component, 
together with the grade, that was identified as a deficiency and 
identify other baseline data, including all relevant raw data;
    (2) Describe any other problems with performance and/or compliance 
that were identified during an on-site review of the PHA's operations;
    (3) Describe the procedures that shall be followed to correct each 
deficiency;
    (4) Provide a timetable for the correction of each deficiency; and
    (5) Provide for or facilitate technical assistance to the PHA.
    (e) Determination of acceptability of Improvement Plan (1) The Hub 
Office/Program Center shall approve or deny an Improvement Plan and 
notify the PHA of its decision.
    (2) An Improvement Plan that is not approved shall be returned to 
the PHA with recommendations from the Hub Office/Program Center for 
revising the Improvement Plan to obtain approval.
    (f) Submission of revised Improvement Plan. The PHA shall submit a 
revised Improvement Plan within 30 days of its receipt of the Hub 
Office/Program Center recommendations.
    (g) Failure to submit acceptable Improvement Plan or correct 
deficiencies. (1) The Hub Office/Program Center shall notify a PHA if a 
PHA fails to submit an acceptable Improvement Plan or fails to correct 
deficiencies within the time specified in an Improvement Plan or such 
extensions that may be granted by HUD.
    (2) The PHA shall respond to the Hub Office/Program Center's 
notification within 30 days and provide the Hub Office/Program Center 
with the reasons for its lack of progress in submitting or carrying out 
the Improvement Plan.
    (3) The Hub Office/Program Center shall advise the PHA whether its 
reasons for lack of progress are acceptable. If the Hub Office/Program 
Center determines that the PHA's reasons for lack of progress are 
unacceptable, HUD shall notify the PHA that it shall be referred to the 
HUD office with jurisdiction over Grade B, C, or D PHAs for remedial 
actions, or such actions as that office may determine appropriate in 
accordance with the provisions of the ACC, this part and other HUD 
regulations, including the remedies available for substantial default.
    (4) If the HUD office with jurisdiction over Grade B, C, or D PHAs 
determines that a PHA failed to correct deficiencies within the time 
specified in an Improvement Plan or such extensions as may be granted 
by HUD, HUD may take further action to sanction the PHA, but only after 
the PHA has had one year since the PHA was notified it was a Grade B, 
C, or D PHA to correct its deficiencies.


Sec.  902.75  Referral of Grade F PHAs.

    (a) General. After a PHA has received notification it is a Grade F 
PHA (i.e., Grade F PHA or Capital Fund Grade F PHA), in accordance with 
the requirements of section 6(j)(2)(B) of the Act (42 U.S.C. 
1437d(j)(2)(B)) and in accordance with this part, HUD shall refer the 
PHA to the appropriate HUD office for remedial action. The remedial 
actions taken by HUD and the PHA will include actions statutorily 
required, and such other actions that HUD determines to be appropriate.
    (b) Memorandum of Agreement (MOA). HUD shall initiate the 
development of an MOA, within 30 days of notifying a PHA that it is a 
Grade F PHA. The PHA must execute the MOA as drafted by HUD within 10 
days after issuance. The final MOA is a binding contractual agreement 
between HUD and a PHA.
    (c) Scope of the MOA. The scope of the MOA may vary depending upon 
the extent of the deficiencies identified in the PHAS assessment. All 
MOAs will include:
    (1) Each PHAS indicator, sub-indicator or component, together with 
the grade, that was identified as a deficiency and other baseline data, 
including all relevant raw data;
    (2) Performance targets for the periods specified by HUD;
    (3) Strategies for the PHA to use to achieve the performance 
targets within the time period of the MOA;
    (4) Technical assistance that will be provided to the PHA or 
facilitated by HUD;

[[Page 6291]]

    (5) Incentives for meeting the targets, such as the removal of 
Grade F PHA designation;
    (6) The consequences for failing to meet the targets including, but 
not limited to, the sanctions that may be imposed. Sanctions include 
the imposition of budget and management controls by HUD, declaration of 
substantial default, and subsequent actions. Subsequent actions include 
judicial appointment of a receiver, limited denial of participation, 
suspension, debarment, or other actions HUD deems appropriate; and
    (7) A description of the involvement of local public and private 
entities, including PHA resident leaders, in carrying out the MOA and 
rectifying the PHA's deficiencies.
    (d) Parties to the MOA. An MOA will be executed by:
    (1) The PHA Board Chairperson (supported by a Board resolution) or 
a receiver (pursuant to a court ordered receivership agreement, if 
applicable);
    (2) The PHA Executive Director, or a designated receiver (pursuant 
to a court ordered receivership agreement, if applicable) or other 
designated Chief Executive Officer;
    (3) The Director of the HUD office with jurisdiction over the PHA 
while the PHA is a Grade F PHA; and
    (4) The appointing authorities of the Board of Commissioners, 
unless exempted by the HUD office with jurisdiction over the PHA while 
the PHA is a Grade F PHA.
    (e) Failure to execute MOA or improve performance under MOA. HUD 
will take further action if the PHA fails or refuses to execute an MOA 
within the period provided in paragraph (b) of this section, or the PHA 
operating under an executed MOA does not improve its performance as 
provided in paragraph (f) of this section. HUD shall take the actions 
required by Sec.  902.77(a).
    (f) Recovery. (1) Two year maximum recovery period. After referral 
to the appropriate HUD office for remedial action, the PHA has two 
years to improve its performance as measured by the PHAS indicators. 
The PHA must improve its performance in each year of the two-year 
period as required by the Act or HUD will take further action as set 
forth in Sec.  902.77.
    (2) Benchmarks. (i) By the end of the first year, the PHA must make 
the following improvements. For a Grade F PHA, for each indicator with 
a grade of F, the PHA must improve that indicator's grade value by at 
least 50 percent of the difference between its value and the minimum 
grade value for a grade of D. For a Capital Fund Grade F PHA, the PHA 
must obligate 50 percent of the unobligated funds and/or expend 50 
percent of the unexpended funds.
    (ii) By the end of the second year, the PHA must make the following 
improvements. For a Grade F PHA, the PHA must achieve an overall PHAS 
grade of D and a grade of D for each of the four indicators. For a 
Capital Fund Grade F PHA, the PHA must obligate 100 percent of the 
unobligated funds and/or expend 100 percent of the unexpended funds.
    (iii) The end of the first year is one year from the date the PHA 
receives the initial notice of its final overall PHAS grade and Grade F 
PHA designation. The end of the second year is two years from the date 
the PHA receives the initial notice of its final overall PHAS grade and 
Grade F PHA designation.
    (g) Audit review. HUD shall perform an audit review and may, at its 
discretion, select the audit firm to perform the audit of the PHA that 
is a Grade F PHA. Further, HUD may, at its discretion, serve as the 
audit committee for the audit in question.
    (h) Continuation of services to residents. To the extent feasible, 
all services to residents will continue uninterrupted during the time a 
PHA is a Grade F PHA and under jurisdiction of the appropriate HUD 
office.


Sec.  902.77  Actions and sanctions.

    (a) Actions against Grade F PHAs. (1) Failure to execute or meet 
the MOA requirements. The failure of a Grade F PHA to execute or meet 
the requirements of an MOA in accordance with Sec.  902.75 constitutes 
a substantial default under Sec.  902.79. The HUD office with 
jurisdiction over the PHA while the PHA is a Grade F PHA will recommend 
to the Assistant Secretary that the PHA be declared in substantial 
default. In accordance with Sec.  902.79, the Assistant Secretary shall 
notify the PHA of the default and allow the PHA an opportunity to cure 
the default. If the PHA fails to cure the default within a period not 
to exceed 30 days unless the Assistant Secretary determines that a 
longer period is appropriate, HUD shall take further action.
    (2) Actions. (i) For PHAs with fewer than 1250 units, HUD shall 
initiate either the judicial appointment of a receiver or an 
administrative receivership.
    (ii) For PHAs with 1250 or more units, HUD shall initiate the 
judicial appointment of a receiver or an administrative receivership, 
but may only initiate an administrative receivership while HUD's 
petition for judicial receivership is pending.
    (iii) For all PHAs, following the recommendation of the Assistant 
Secretary, HUD shall initiate the interventions provided in Sec.  
902.83, and may initiate such other sanctions available to HUD, 
including limited denial of participation, suspension, debarment, and 
referral to the appropriate federal government agencies or offices for 
the imposition of civil or criminal sanctions.
    (b) Actions against other PHAs in substantial default. A PHA that 
is not a Grade F PHA, but that has been found to be in substantial 
default under the provisions of Sec.  902.79 also is subject to further 
action. The Assistant Secretary makes the determination that a PHA is 
in substantial default. In accordance with Sec.  902.79, the Assistant 
Secretary shall notify the PHA of the default and allow the PHA an 
opportunity to cure the default. If the PHA fails to cure the default 
within the specified period of time, HUD shall initiate the judicial 
appointment of a receiver or the interventions provided in Sec.  
902.83, as recommended by the Assistant Secretary. HUD also may 
initiate such other available sanctions, including limited denial of 
participation, suspension, debarment, and referral to the appropriate 
federal government agencies or offices for the imposition of civil or 
criminal sanctions.
    (c) Receivership/Possession of PHA by HUD. (1) The appointments of 
receivers, the actions of receivers, and HUD's responsibilities toward 
the receivers are governed by the provisions of section 6(j)(3) of the 
Act (42 U.S.C. 1437d(j)(3)).
    (2) If a judicial receiver is appointed, the receiver, in addition 
to the powers provided by the court, shall have available the powers 
provided by section 6(j)(3)(C) of the Act (42 U.S.C. 1437d(j)(3)(C)).
    (3) If HUD assumes responsibility for all or part of the PHA, the 
Secretary of HUD shall have available the powers provided by section 
6(j)(3)(D) of the Act (42 U.S.C. 1437d(j)(3)(D)).
    (4) If an administrative receiver is appointed, the Secretary may 
delegate to the administrative receiver any of the powers provided to 
the Secretary as described in paragraph (c)(3) of this section, in 
accordance with section 6(j)(3)(D) of the Act.
    (d) Continuation of services to residents. To the extent feasible, 
all services to residents shall continue uninterrupted, during the time 
a PHA is under referral to HUD.


Sec.  902.79  Substantial default.

    (a) Events or conditions that constitute substantial default. The

[[Page 6292]]

following events or conditions shall constitute substantial default.
    (1) HUD may determine that events have occurred or that conditions 
exist that constitute a substantial default if a PHA is determined to 
be in violation of federal statutes, including but not limited to the 
Act, or in violation of regulations implementing such statutory 
requirements, whether or not such violations would constitute a 
substantial breach or default under provisions of the PHA's ACC.
    (2) HUD may determine that a PHA's failure to execute an MOA or 
satisfy the terms of an MOA entered into pursuant to Sec.  902.75, or 
to make reasonable progress to execute or meet requirements included in 
an MOA, are events or conditions that constitute a substantial default.
    (3) HUD shall determine that a Grade F PHA that does not show 
substantial improvement, as described in Sec.  902.75(f), is in 
substantial default.
    (4) HUD may determine that a substantial breach or default in the 
terms and conditions of the PHA's ACC constitutes a substantial 
default.
    (b) Scope of substantial default. HUD may determine that the events 
or conditions constituting a substantial default are limited to a 
portion of a PHA's public housing operations, designated either by 
program, by operational area, or by property(ies).
    (c) Notification of substantial default and response. In the event 
of substantial default described in paragraph (a) of this section or if 
information from an annual assessment, audit, or any other credible 
source (including, but not limited to, the Office of Fair Housing 
Enforcement, the OIG, a court order, or a referral from a mayor or 
other official) indicates that events or conditions may exist that 
constitute a substantial default or breach, HUD shall perform an 
independent investigation. Upon a determination or finding, HUD shall 
advise a PHA of such substantial default or of such information. HUD is 
authorized to protect the confidentiality of the source(s) of such 
information in appropriate cases.
    (1) Form of notification. Except in the case of apparent fraud or 
criminality, and/or in the case of an emergency condition that poses an 
imminent threat to the life, health, or safety of residents, the 
Assistant Secretary shall provide written notification to the PHA of 
the determination or finding that events have occurred or that 
conditions exist that constitute substantial default. Before taking 
further action, HUD shall provide the PHA an opportunity to take 
corrective action, including the remedies and procedures available to 
PHAs designated Grade F. The written notification shall be transmitted 
to the Executive Director, the Chairperson of the Board, and the 
appointing authority(ies) of the Board. The written notification shall 
include, but is not limited to:
    (i) Identification of the specific covenants, conditions, and/or 
agreements under which the PHA is determined to be in noncompliance;
    (ii) Identification of the specific events, occurrences, or 
conditions that constitute the determined noncompliance;
    (iii) Identification of the information, referrals, and 
opportunities to initiate corrective action;
    (iv) Identification of a specific time period of not less than 10 
days (except in cases of apparent fraud or other criminal behavior, 
and/or under emergency conditions) nor more than 30 days, during which 
the PHA shall be required to demonstrate that the determination or 
finding is not substantively accurate; and
    (v) A statement indicating that, absent a satisfactory response in 
accordance with paragraph (c)(2) of this section, HUD will take action, 
using any or all of the interventions specified in Sec.  902.83 and 
determined to be appropriate to remedy the noncompliance, citing Sec.  
902.83, and any additional authority.
    (2) Receipt of notification. Upon receipt of the notification, the 
PHA must demonstrate, within the time period permitted in the 
notification, factual error(s) in HUD's description of events, 
occurrences, or conditions, or show that the events, occurrences, or 
conditions do not constitute noncompliance with the statute, 
regulation, covenants, or conditions.
    (3) Waiver of notification. A PHA may waive, in writing, receipt of 
written notice from HUD of a finding of substantial default, and 
voluntarily consent to a determination of substantial default. The PHA 
shall concur on the existence of substantial default conditions that 
can be remedied by technical assistance, and the PHA shall provide HUD 
with written assurance that the PHA shall address all deficiencies. HUD 
shall then immediately proceed with interventions as provided in Sec.  
902.83.
    (d) Emergency situations. In any situation determined to be an 
emergency, or in any case when the events or conditions precipitating 
the intervention are determined to be the result of criminal or 
fraudulent activity, the Secretary or the Secretary's designee is 
authorized to intercede to protect the residents' and HUD's interests 
by causing the proposed interventions to be implemented without appeals 
or delays.


Sec.  902.83  Interventions.

    (a) If HUD determines that a substantial default exists under this 
part, HUD may initiate any interventions deemed necessary to maintain 
dwellings that are decent, safe, sanitary and in good repair for the 
residents. Interventions under this part (including an assumption of 
operating responsibilities) may be limited to one or more of a PHA's 
operational areas (e.g., maintenance, modernization, occupancy, or 
financial management) or to a single public housing property or a group 
of properties. Under this limited intervention procedure, HUD may 
select, or participate in the selection of, an AME to assume management 
responsibility for a specific property, a group of properties in a 
geographical area, or a specific operational area. During the limited 
intervention procedure, the PHA retains responsibility for all 
programs, operational areas, and properties not subject to the 
intervention.
    (b) Interventions may include:
    (1) Providing technical assistance for existing PHA management 
staff;
    (2) Selecting or participating in the selection of an AME to 
provide technical assistance or other services up to and including 
contract management of all or any part of the public housing properties 
administered by a PHA;
    (3) Assuming possession and operational responsibility for all or 
any part of the public housing administered by a PHA;
    (4) Entering into agreements, arrangements, and/or contracts for or 
on behalf of a PHA, or acting as the PHA, and expending or authorizing 
the expenditure of PHA funds, irrespective of the source of such funds, 
to remedy the events or conditions constituting the substantial 
default;
    (5) Providing intervention and assistance necessary to remedy 
emergency conditions;
    (6) Selecting an administrative receiver to manage and operate all 
or part of the PHA's housing after soliciting competitive proposals; 
and
    (7) Petitioning for the appointment of a receiver to any District 
Court of the United States or any court of the state in which real 
property of the PHA is located.
    (c) The receiver is to conduct the affairs of the PHA:
    (1) In a manner consistent with statutory, regulatory, and 
contractual obligations of the PHA;

[[Page 6293]]

    (2) In accordance with additional terms and conditions that the 
court may provide; and
    (3) In accordance with section 6(j)(3)(C) of the Act (42 U.S.C. 
1437d(j)(3)(C)).
    (d) Any party may petition for termination of a receiver appointed 
pursuant to this section. The receiver may be terminated when the court 
determines that all defaults have been cured or the PHA is capable 
again of discharging its duties.
    (e) HUD may take the actions described in this section sequentially 
or simultaneously in any combination.


Sec.  902.85  Resident petitions for remedial action.

    Residents may petition HUD to take remedial action pursuant to 
sections 6(j)(3)(A)(i) through (iv) of the Act (42 U.S.C. 
1437d(j)(3)(A)(i) through (iv)) if:
    (a) the resident petitioners equal at least 20 percent of the PHA's 
residents; or
    (b) the petitioning organization or organizations' membership 
equals at least 20 percent of the PHA's residents.

    Dated: January 9, 2003.
Michael Liu,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 03-2608 Filed 1-31-03; 4:06 pm]
BILLING CODE 4210-33-P